A cost-cutting project will decrease costs by $48,500 a year. The annual depreciation on the project's fixed assets will be $11,300 and the tax rate is 34 percent. What is the amount of the change in the firm's operating cash flow resulting from this project?

Question

Quizplus · Accepted Answer

The change in operating cash flow is calculated as the cost savings minus taxes on those savings, plus the tax shield from depreciation. The formula is: Operating Cash Flow = (Cost Savings - Depreciation) * (1 - Tax Rate) + Depreciation. Plugging in the numbers: ($48,500 - $11,300) * (1 - 0.34) + $11,300 = $35,852.

A Cost-Cutting Project Will Decrease Costs by $48,500 a Year