Which of the following are correct methods for computing the operating cash flow of a project assuming that the interest expense is equal to zero?
I. EBIT + Depreciation - Taxes
II. EBIT + Depreciation + Taxes
III. Net Income + Depreciation
IV. (Sales - Costs) × (Taxes + Depreciation) × (1 - Taxes)
A) I and III only
B) II and IV only
C) II and III only
D) I, III, and IV only
E) II, III, and IV only

Question

Quizplus · Accepted Answer

The correct method for computing operating cash flow of a project assuming that the interest expense is equal to zero is:

Operating Cash Flow = EBIT + Depreciation - Taxes

Therefore, option I is correct.

Option II is incorrect because EBIT + Depreciation + Taxes would give us earnings before taxes and interest, whereas we need to deduct taxes from EBIT to arrive at operating cash flow.

Option III is correct because Net Income + Depreciation would give us operating cash flow after taxes, which is another way to calculate it.

Option IV is incorrect because (Sales - Costs) × (Taxes + Depreciation) × (1 - Taxes) would give us the after-tax cash flow, which is not the same as operating cash flow before taxes.

Which of the Following Are Correct Methods for Computing the Operating