A project is expected to generate annual revenues of $124,100, with variable costs of $77,200, and fixed costs of $17,700. The annual depreciation is $4,250 and the tax rate is 23 percent. What is the annual operating cash flow?

Question

BlackTom AI · Accepted Answer

We start by restating the given figures to ensure we understand the cash flow components.
- Revenue: 124,100
- Variable costs: 77,200
- Fixed costs: 17,700
- Depreciation: 4,250
- Tax rate: 23%

Next, compute Earnings Before Interest and Taxes (EBIT), which is Revenue minus all operating costs (including variable and fixed) and depreciation:
- EBIT = 124,100 − 77,200 − 17,700 − 4,250 = 24,950

Then apply the tax rate to EBIT to get the after‑tax operating income, using the standard OCF formula: OCF = (EBIT × (1 − Tax Rate)) + Depreciation.
- After‑tax part: 24,950 × (1 − 0.23) = 24,950 × 0.77 = 19,211.5
- Add back depreciation (a non-cash charge): 19,211.5 + 4,250 = 23,461.5

Now evaluate each option:
- Option "$47,878": This is much higher than the calculated OCF and suggests either ignoring taxes or depreciation, or double-counting cash effects. It does not align with EBIT and tax effects.
- Option "$65,578": Similarly overstates OCF; it would require treating depreciation as cash flow or applying an incorrect tax treatment, which is not correct for operating cash flow.
- Option "$23,462": This matches the computed value when rounding 23,461.5 to the nearest dollar. It correctly incorporates after‑tax EBIT plus depreciation.
- Option "$33,450": This value corresponds to EBIT before tax and before depreciation or misapplying the tax shield; it omits the depreciation tax shield component that OCF includes.
- Option "$29,200": Note that 29,200 equals Revenue minus variable and fixed costs, i.e., EBIT before considering depreciation. It omits the depreciation deduction from EBIT and also the tax effect, so it cannot be the operating cash flow.

In summary, the correct approach recognizes EBIT, applies the tax rate to EBIT, then adds back depreciation to reflect the non-cash expense. The option that aligns with this calculation is the one that reflects 23,461.5 (rounded to 23,462).

A project is expected to generate annual revenues of $124,100, with variable costs of $77,200, and fixed costs of $17,700. The annual depreciation is $4,250 and the tax rate is 23 percent. What is the annual operating cash flow?

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