A firm reported sales of $350,000, interest expense of $2,330, costs of $140,000, and depreciation expense of $17,800. The firm's average income tax rate is 21 percent. How much operating cash flow did the firm generate?

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BlackTom AI · Accepted Answer

We start by identifying the given figures and what operating cash flow (OCF) typically represents in a simple, no-change-in-working-capital scenario. The firm reports: sales of 350,000, costs of 140,000, depreciation of 17,800, an interest expense of 2,330, and an average tax rate of 21%. In many introductory finance contexts, OCF is calculated as EBIT(1 - T) + Depreciation, where EBIT = Sales − Costs − Depreciation, and T is the tax rate.

Step 1: Compute EBIT. This is earnings before interest and taxes, so we subtract operating costs and depreciation from sales: EBIT = 350,000 − 140,000 − 17,800 = 192,200.

Step 2: Apply the tax rate to EBIT to get after-tax operating income. Taxes on EBIT are T × EBIT = 0.21 × 192,200 = 40,362. Therefore, after-tax operating income is EBIT × (1 − T) = 192,200 × 0.79 = 151,838.

Step 3: Add back non-cash depreciation to obtain OCF. Since depreciation is a non-cash charge that reduces taxes but does not involve an actual cash outflow in the period, we add it back: OCF = 151,838 + 17,800 = 169,638.

At this point, we have obtained an OCF value of 169,638 using the standard EBIT-based approach with depreciation added back. This aligns with the common formula OCF = EBIT(1 − T) + Depreciation, and it explicitly accounts for the tax shield provided by depreciation while excluding interest from the operating cash flow calculation since OCF aims to reflect cash generated by operations before financing decisions.

Option-by-option analysis:
- Option "$164,000$": This value is substantially lower than the calculated 169,638. It might reflect an under-accounting of the tax shield or an omission of depreciation's cash effect, but it does not match the standard computation here.
- Option "$148,530$": This is much too low relative to the computed after-tax operating figure, suggesting a misapplication of either the tax rate, depreciation, or both, or an incorrect subtraction of an operating component.
- Option "$162,236$": Closer than some other distractors but still below the 169,638 result. Could result from applying taxes to EBIT and then subtracting depreciation, which would be inconsistent with the conventional OCF definition that adds back depreciation.
- Option "$165,794$": This value is in the same neighborhood as the other numbers but would require a slightly different combination of components (e.g., a different tax base or rounding) to match exactly. It does not arise directly from the standard OCF formula used here.
- Option "$170,127$": This is the closest to 169,638 but still not equal. It might result from rounding differences in intermediate steps or a variant calculation of tax or depreciation effects.

Overall, when following the typical OCF computation OCF = EBIT(1 − T) + Depreciation with EBIT defined as Sales − Costs − Depreciation, the resulting value is 169,638. The presence of an interest expense in the data is relevant for net income but does not enter the operating cash flow calculation under the standard EBIT-based approach, as OCF is intended to capture operating performance independent of financing decisions.

33:390:300:13 FINANCIAL MANAGEMENT Exam 1- Requires Respondus LockDown Browser

A firm reported sales of $350,000, interest expense of $2,330, costs of $140,000, and depreciation expense of $17,800. The firm's average income tax rate is 21 percent. How much operating cash flow did the firm generate?

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