Question 10CRS-TP2: Mont Blanc Livestock Pens, Inc., has projected a sales volum...
Calculating Operating Cash Flow Mont Blanc Livestock Pens, Inc., has projected a sales volume of $1,650 for the second year of a proposed expansion project. Costs normally run 60 percent of sales, or about $990 in this case. The depreciation expense will be $100, and the tax rate is 35 percent. What is the operating cash flow? Calculate your answer using all of the approaches (including the top-down, bottom-up, and tax shield approaches) described in the chapter.
First, we can calculate the project’s EBIT, its tax bill, and its net income.
EBIT = Sales – Costs – Depreciation
= $1,650 – 990 – 100 = $560
Taxes = $560 × .35 = $196
Net income = $560 – 196 = $364
With these numbers, operating cash flow is:
OCF = EBIT + Depreciation – Taxes
= $560 + 100 – 196
= $464
Using the other OCF definitions, we have:
Bottom-up OCF = Net income + Depreciation
= $364 + 100
= $464
Top-down OCF = Sales – Costs – Taxes
= $1,650 – 990 – 196
= $464
Tax shield OCF = (Sales – Costs) × (1 – .35) + Depreciation × .35
= ($1,650 – 990) × .65 + 100 × .35
= $464
As expected, all of these definitions produce exactly the same answer.