Question

The owner of a bicycle repair shop forecasts revenues of $188,000 a year. Variable costs will be $57,000, and rental costs for the shop are $37,000 a year. Depreciation on the repair tools will be $17,000. The tax rate is 40%. Calculate operating cash flow for the year by using all three methods: (a) adjusted accounting profits; (b) cash inflow/cash outflow; (c) the depreciation tax shield approach. a) 63,200 b) 63,200 c) 63,200 a) 56,400 b) 56,400 c) 56,400 a) 53,200 b) 53,200 c) 53,200 a) 73,400 b) 73,400 c) 73,400

Answer 1

Adjusted accounting profit - $63,200

Cash inflow / Outflow - $63,200

Depreciation Tax shield - $63,200

Step-by-step explanation:

Revenue - $188,000

Variable cost ($57,000)

Contribution $131,000

Rental cost ($37,000)

Depreciation (17,000)

($54,000)

PBIT 77,000

Income Tax (40%) (30,800)

Net Income 46,200

A) Adjusted Accounting profit

Add back non cash expenses (depreciation) = 46,200+$17000 =$63,200

B)Cash Inflow/Outflow

Revenue $188,000

Variable cost (57,000)

Rental cost (37000)

Income Tax (30,800)

$63,200

C Depreciation Tax Shield

Tax shield =40%*17,000= $6800

Cash income from operation (EBITDA*(1-tax rate) = 56,400

Add back $6,800 = 6,800

$63,200