If net income = $46,750, depreciation expense = $20,000, interest expense = $10,000, and the tax rate = 15%, what is operating cash flow?

Question

BlackTom AI · Accepted Answer

To determine operating cash flow (OCF) from the given data, we need to translate net income into a cash-based measure by adding back non-cash expenses (depreciation) and accounting for taxes using the appropriate relationships between EBIT, interest, and net income.

First, reconstruct EBIT (earnings before interest and taxes) from net income:
- Net income = (EBIT − Interest) × (1 − Tax rate)
- We are given net income = 46,750, Interest = 10,000, Tax rate = 15% (0.15), so (1 − Tax rate) = 0.85.
- Solve for EBIT: EBIT = Net income / 0.85 + Interest = 46,750 / 0.85 + 10,000 = 55,000 + 10,000 = 65,000.

Next, compute taxes using EBIT and Interest:
- Taxes = Tax rate × (EBIT − Interest) = 0.15 × (65,000 − 10,000) = 0.15 × 55,000 = 8,250.

Now apply the OCF formula:
- OCF = EBIT + Depreciation − Taxes = 65,000 + 20,000 − 8,250 = 76,750.

Option analyses:
- Option a: 21,250. This would require subtracting either taxes or depreciation in a way that ignores either the positive effect of depreciation or the EBIT level; it is far too low given the sizable depreciation and net income. The correct process yields a much larger cash flow because depreciation adds back non-cash expense and EBIT is substantial.
- Option b: 72,250. This is close but misses 4,500 as a component. Possible miscalculation could come from miscomputing taxes or omitting part of the depreciation addition, but the proper tax calculation using EBIT and interest yields 8,250 in taxes, not a smaller amount.
- Option c: 76,750. This matches the full, correct computation: 65,000 (EBIT) + 20,000 (depreciation) − 8,250 (taxes) = 76,750. The decomposition shows how each piece contributes to the final OCF.
- Option d: 85,250. This would imply either adding back taxes or depreciation in excess, or misapplying the tax rate, inflating the OCF beyond the accurate calculation. It overstates the effect of depreciation and/or understates taxes relative to the correct values.

In summary, the correct approach uses net income to back out EBIT, applies taxes on (EBIT − Interest), adds back depreciation, and subtracts taxes to arrive at OCF. The arithmetic above confirms 76,750 as the result, while the other options result from common missteps such as omitting interest in tax calculations, misplacing depreciation, or miscomputing the tax base.

ACCT 3380 R10 SPRING 2025 Module 2: Practice Questions, Due Sunday 11PM

If net income = $46,750, depreciation expense = $20,000, interest expense = $10,000, and the tax rate = 15%, what is operating cash flow?

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