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A proposed new project has projected sales of $123,000, costs of $57,000, and depreciation of $12,600. The tax rate is 35 percent. Calculate operating cash flow using the four different approaches. (Do not round intermediate calculations.)

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Answer:

Approach 1 ⇒ EBIT + Depreciation - Taxes approach

EBIT = Sales - Costs - Depreciation

= 123,000 - 57,000 - 12,600

= $53,400

EBIT = EBT as no interest in question.

Tax = EBIT * Tax rate

= 53,400 * 35%

= $18,690

Operating cashflow = 53,400 + 12,600 - 18,690

= $47,310

Approach 2 ⇒ Top-down Approach

= Sales - cost - tax

= 123,000 - 57,000 - 18,690

= $47,310

Approach 3 ⇒ Tax-Shield

= (Sales - Cost) * (1 - Tax rate) + (Depreciation * Tax rate)

= (123,000 - 57,000) * (1 - 35%) + (12,600 * 35%)

= $47,310

Approach 4 ⇒ Bottom-up

=  (Sales – Cost – Depreciation) * (1 - Tax rate) + Depreciation

= (123,000 - 57,000 - 12,600) * ( 1 - 35%) + 12,600

= $47,310

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