Ronnie's Coffee House is considering a project with a life of one year that will produce sales of $6,000 and increase cash expenses by $2,500.If the project is implemented,taxes will increase by $700.The additional depreciation expense will be $200 and interest expense will increase by $100.An initial cash outlay of $200 is required for net working capital.What is the amount of the operating cash flow using the top-down approach?

Question

Quizplus · Accepted Answer

The top-down approach in calculating operating cash flow involves subtracting all cash expenses (including taxes) from cash inflows (excluding depreciation and interest expenses).

Cash inflows:
Sales revenue: $6,000

Cash expenses:
Cash expenses: -$2,500
Taxes: -$700

Operating cash flow = $6,000 - $2,500 - $700 = $2,800

Adding back the depreciation and interest expenses: 
Operating cash flow + depreciation expense + interest expense = $2,800 + $200 + $100 = $3,100

Finally, subtracting the initial cash outlay for working capital: 
Operating cash flow + depreciation expense + interest expense - initial investment in working capital = $3,100 - $200 = $2,900

Therefore, the correct answer is (C) $2,800.

Ronnie's Coffee House Is Considering a Project with a Life