Questions: A proposed new project has projected sales of 219,000, costs of 96,000, and depreciation of 26,000. The tax rate is 23 percent. Calculate operating cash flow using the four different approaches. Note: Do not round intermediate calculations. - Operating cash flow: 100,690 - Top-down: 94,710 - Tax shield: 80,670 - Bottom-up: 100,690

A proposed new project has projected sales of 219,000, costs of 96,000, and depreciation of 26,000. The tax rate is 23 percent. Calculate operating cash flow using the four different approaches.
Note: Do not round intermediate calculations.

- Operating cash flow: 100,690
- Top-down: 94,710
- Tax shield: 80,670
- Bottom-up: 100,690

Transcript text: A proposed new project has projected sales of $\$ 219,000$, costs of $\$ 96,000$, and depreciation of $\$ 26,000$. The tax rate is 23 percent. Calculate operating cash flow using the four different approaches. Note: Do not round intermediate calculations. \begin{tabular}{|l|cr|} \hline & \multicolumn{2}{|c|}{ Operating cash flow } \\ \hline EBIT + Depreciation - Taxes & $\$$ & 100,690 \\ \hline Top-down & $\$$ & 94,710 \\ \hline Tax shield & $\$$ & 80,670 \\ \hline Bottom-up & $\$$ & 100,690 \\ \hline \end{tabular}

Solution

Solution Steps

To calculate the operating cash flow using the four different approaches, we need to follow these steps:

EBIT + Depreciation - Taxes: Calculate Earnings Before Interest and Taxes (EBIT), add back depreciation, and subtract taxes.
Top-down: Subtract costs and taxes from sales.
Tax shield: Calculate the tax shield from depreciation and add it to the after-tax EBIT.
Bottom-up: Start with net income and add back depreciation.

Step 1: Calculate EBIT

To find the Earnings Before Interest and Taxes (EBIT), we use the formula: \[ EBIT = \text{Sales} - \text{Costs} - \text{Depreciation} \] Substituting the given values: \[ EBIT = 219000 - 96000 - 26000 = 97000 \]

Step 2: Calculate Taxes for EBIT Approach

Next, we calculate the taxes based on EBIT: \[ \text{Taxes} = EBIT \times \text{Tax Rate} = 97000 \times 0.23 = 22310 \]

Step 3: Calculate Operating Cash Flow (EBIT + Depreciation - Taxes)

Using the EBIT approach, the operating cash flow is calculated as: \[ OCF_{\text{EBIT}} = EBIT + \text{Depreciation} - \text{Taxes} \] Substituting the values: \[ OCF_{\text{EBIT}} = 97000 + 26000 - 22310 = 100690 \]

Step 4: Calculate Taxes for Top-Down Approach

For the top-down approach, we first calculate the taxes: \[ \text{Taxes}_{\text{top-down}} = (\text{Sales} - \text{Costs}) \times \text{Tax Rate} = (219000 - 96000) \times 0.23 = 28290 \]

Step 5: Calculate Operating Cash Flow (Top-Down)

The operating cash flow using the top-down approach is: \[ OCF_{\text{top-down}} = \text{Sales} - \text{Costs} - \text{Taxes}_{\text{top-down}} \] Substituting the values: \[ OCF_{\text{top-down}} = 219000 - 96000 - 28290 = 94710 \]

Step 6: Calculate Tax Shield

The tax shield from depreciation is calculated as: \[ \text{Tax Shield} = \text{Depreciation} \times \text{Tax Rate} = 26000 \times 0.23 = 5980 \]

Step 7: Calculate Operating Cash Flow (Tax Shield)

Using the tax shield approach, the operating cash flow is: \[ OCF_{\text{tax shield}} = (EBIT \times (1 - \text{Tax Rate})) + \text{Tax Shield} \] Substituting the values: \[ OCF_{\text{tax shield}} = (97000 \times (1 - 0.23)) + 5980 = 80670 \]

Step 8: Calculate Net Income for Bottom-Up Approach

The net income is calculated as: \[ \text{Net Income} = EBIT \times (1 - \text{Tax Rate}) = 97000 \times (1 - 0.23) = 74690 \]

Step 9: Calculate Operating Cash Flow (Bottom-Up)

Using the bottom-up approach, the operating cash flow is: \[ OCF_{\text{bottom-up}} = \text{Net Income} + \text{Depreciation} \] Substituting the values: \[ OCF_{\text{bottom-up}} = 74690 + 26000 = 100690 \]

Final Answer

The operating cash flows calculated using the four different approaches are:

$ OCF_{\text{EBIT}} = 100690 $
$ OCF_{\text{top-down}} = 94710 $
$ OCF_{\text{tax shield}} = 80670 $
$ OCF_{\text{bottom-up}} = 100690 $

Thus, the final answers are: \[ \boxed{OCF_{\text{EBIT}} = 100690} \] \[ \boxed{OCF_{\text{top-down}} = 94710} \] \[ \boxed{OCF_{\text{tax shield}} = 80670} \] \[ \boxed{OCF_{\text{bottom-up}} = 100690} \]

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