A project will increase the sales of Joe's Workshop by $50,000 and increase cash expenses by $36,000. The project will cost $30,000 and be depreciated using straight-line depreciation to a zero book value over the 3-year life of the project. The company has a marginal tax rate of 35%. What is the operating cash flow of the project using the tax shield approach?

Question

Quizplus · Accepted Answer

The operating cash flow (OCF) using the tax shield approach is calculated as: OCF = (Sales - Cash Expenses) * (1 - Tax Rate) + Depreciation * Tax Rate. Here, Sales = $50,000, Cash Expenses = $36,000, Depreciation = $30,000 / 3 = $10,000, and Tax Rate = 35%. So, OCF = ($50,000 - $36,000) * (1 - 0.35) + $10,000 * 0.35 = $9,100 + $3,500 = $12,600.

A Project Will Increase the Sales of Joe's Workshop by $50,000