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

Question

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.

Accepted Answer

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.

Question 10.S-T.2: Calculating Operating Cash Flow Mont Blanc Livestock Pens, I...

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