MC algo 9-13 Calculating OCF

Rock Haven has a proposed project that will generate sales of 1,800 units annually at a selling price of $28 each. The fixed costs are $15,900 and the variable costs per unit are $8.35. The project requires $31,600 of fixed assets that will be depreciated on a straight-line basis to a zero book value over the 4-year life of the project. The salvage value of the fixed assets is $8,100 and the tax rate is 22 percent. What is the operating cash flow?

Question

MC algo 9-13 Calculating OCF

Rock Haven has a proposed project that will generate sales of 1,800 units annually at a selling price of $28 each. The fixed costs are $15,900 and the variable costs per unit are $8.35. The project requires $31,600 of fixed assets that will be depreciated on a straight-line basis to a zero book value over the 4-year life of the project. The salvage value of the fixed assets is $8,100 and the tax rate is 22 percent. What is the operating cash flow?

BlackTom AI · Accepted Answer

Operating cash flow (OCF) is calculated using OCF = (Sales − Variable costs − Fixed costs − Depreciation) × (1 − Tax rate) + Depreciation. This captures after-tax operating profit plus the noncash depreciation add-back.

1. Relevant knowledge points and concepts
- Sales = units × price.
- Total variable cost = units × variable cost per unit.
- Straight-line depreciation = (Initial cost − book value at end) / life; here book value at end is zero, so annual depreciation = 31,600 / 4.
- OCF formula shown above; salvage value affects terminal cash flows, not annual OCF during operating life.

2. Step-by-step reasoning and calculations
- Sales revenue = 1,800 units × $28 = $50,400.
- Total variable costs = 1,800 × $8.35 = 1,800×8 + 1,800×0.35 = 14,400 + 630 = $15,030.
- Fixed (period) costs = $15,900.
- Annual depreciation = $31,600 / 4 = $7,900.
- Earnings before interest and taxes (EBIT) = Sales − Variable − Fixed − Depreciation
  = 50,400 − 15,030 − 15,900 − 7,900 = $11,570.
- Taxes = 22% × 11,570 = 0.22 × 11,570 = $2,545.40.
- Net income = EBIT − Taxes = 11,570 − 2,545.40 = $9,024.60.
- OCF = Net income + Depreciation = 9,024.60 + 7,900 = $16,924.60 ≈ $16,925.

3. Intermediate steps shown above for each calculation.

4. Why this answer is correct
The OCF formula correctly treats depreciation as a tax-deductible, noncash expense. Adding depreciation back to after-tax operating profit yields cash generated by operations. The salvage value is irrelevant for the periodic OCF calculation (it affects terminal-year cash flow only).

5. Why other options are incorrect (brief)
- $13,449 and $6,021 are too low—these would result from miscomputing sales, variable costs, or omitting the depreciation tax shield.
- $19,010 and $22,139 are too high—these would come from failing to subtract taxes or double-counting depreciation benefits.
Each incorrect option does not align with the precise OCF formula and the numbers given.

6. Conclusion
Following the correct OCF formula and calculations yields OCF ≈ $16,925, which matches the provided correct answer.

类似问题

A firm reported sales of $350,000, interest expense of $2,330, cost of goods of $140,000, and depreciation of $17,800. The firms tax rate is 21%. How much operating cash flow did the firm generate?

Assume interest expense is equal to zero. Which one of the following calculations shows the correct method for computing the operating cash flow of a project?

Question22 A project has the following annual figures:Sales: $420,000 Cash operating costs: $360,000 Depreciation:$60,000 Tax rate: 30% What is the project's Annual Operating Cash flow (OCF) Select one alternative: $60,000 $1,800 $0 $90,000 ResetMaximum marks: 3 Flag question undefined

Question22 A project has the following annual figures:Sales: $420,000 Cash operating costs: $360,000 Depreciation:$60,000 Tax rate: 30% What is the project's Annual Operating Cash flow (OCF) Select one alternative: $1,800 $60,000 $90,000 $0 ResetMaximum marks: 3 Flag question undefined

Cash generated from a firm's normal business activities is called Blank ______.

Question at position 4 If accounts receivable increase while sales remain constant, operating cash flow will:DoubleStay the sameIncreaseDecrease

A debt-free firm has total sales of $22,980, costs of $16,750, and depreciation of $6,045. What is the operating cash flow at a tax rate of 23 percent?

更多留学生实用工具

智能学习助手

风格化写作助手

论文查重助手

文献引用助手

课堂转译助手

课堂笔记助手

Quiz搜索助手

学校历年真题

智能刷题助手

智能匹配练习

希望你的学习变得更简单