Kurt's Kabinets is looking at a project that will require $80,000 in fixed assets and another $20,000 in net working capital. The project is expected to produce sales of $110,000 with associated costs of $70,000. The project has a 4-year life. The company uses straight-line depreciation to a zero book value over the life of the project. The tax rate is 35%. What is the operating cash flow for this project?
A) $7,000
B) $13,000
C) $27,000
D) $33,000
E) $40,000

Question

Quizplus · Accepted Answer

To calculate the operating cash flow, we need to first calculate the earnings before interest and taxes (EBIT) and then subtract taxes and depreciation:

EBIT = Sales - Costs = $110,000 - $70,000 = $40,000
Depreciation = $80,000 / 4 = $20,000 per year
Taxable Income = EBIT - Depreciation = $40,000 - $20,000 = $20,000
Taxes = $20,000 x 35% = $7,000
Operating Cash Flow = EBIT - Taxes + Depreciation = $40,000 - $7,000 + $20,000 = $33,000

Therefore, the operating cash flow for this project is $33,000, which is option D).

Kurt's Kabinets Is Looking at a Project That Will Require