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An Investment has expected sales of 50
An Investment has expected sales of 50.000 unit with the selling price of $30 each unit. The Variable cost are 50% of sales and fixed cost are $100.000. The Investment would required fixed assets cost $100,000 with useful life 4 years. Assuming a tax rate of 30% percent
Calculate the Operating Cash flow using the four different approaches
Expert Solution
Selling price = 30
Expected sales = 50,000 units
Variable cost = (30×50%)=15
Total sales (expected units)=50,000 × 30 = 1,500,000
Total variable cost = 50,000 × 15 = 750,000
Fixed cost = 100,000
Total cost = 750,000 + 100,000 = 850,000
Gross profit = 1,500,000 - 850,000 = 750,000
PBDT = 750,000 - 100,000=650,000
Depreciation = 100000 / 4 = 25,000
PBT = 650,000 - 25,000 = 625,000
Tax 30% = 625,000 ×30% = 187,500
Net income = 625,000 - 187,500 = 437,500
operating cash flow in four approaches
Basic Approach= PBT - Tax + Depreciation = (625000 -187500) +25000)=462,500
Top down approach=( Sales - Cost -Taxes)
=1500000-(850,000)-187500 =462,500
Bottom up approach=Net Income + Depreciation
=437500+25000 =462,500
Tax shield approach=(Sales - Cost)×(1-tax rate) + Depriciation tax rate=(1500000-850000)×(1-0.3)+(25000×0.3) =462,500
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