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) of the project using the tax shield approach can be calculated as:
OCF = (Revenue - Cash Expenses) x (1 - Tax rate) + Tax shield on Depreciation - Initial Investment
OCF = ($50,000 - $36,000) x (1 - 0.35) + ($30,000 / 3 x 0.35) - $30,000
OCF = $14,000 x 0.65 + $3,500 - $30,000
OCF = $9,100
Therefore, the operating cash flow of the project using the tax shield approach is $9,100. Option C is the correct answer.

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