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Operating Cash Flow The financial staff of Cairn Communications has identified the following information for the first year of the roll-out of its new proposed service: Projected sales $20 million Operating costs (not including depreciation) 8 million Depreciation 6 million Interest expense 3 million The company faces a 40% tax rate
Operating Cash Flow
The financial staff of Cairn Communications has identified the following information for the first year of the roll-out of its new proposed service:
| Projected sales | $20 million |
| Operating costs (not including depreciation) | 8 million |
| Depreciation | 6 million |
| Interest expense | 3 million |
The company faces a 40% tax rate. What is the project's operating cash flow for the first year (t = 1)? Write out your answer completely. For example, 2 million should be entered as 2,000,000.
$ _______________
Expert Solution
The operating cash flow is computed as shown below:
= (Projected sales - operating costs - depreciation) + depreciation - tax expenses
The tax expenses is computed as follows:
= (Projected sales - operating costs - depreciation) x tax of 40%
= ($ 20,000,000 - $ 8,000,000 - $ 6,000,000 ) x 40%
= $ 2,400,000
So, the amount will be as follows:
= ($ 20,000,000 - $ 8,000,000 - $ 6,000,000) + $ 6,000,000 - $ 2,400,000
= $ 9,600,000
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