A company is considering investing in a piece of machinery which will cost $550,000. It will
provide an additional $160,000 in sales each year and its annual operating expenses are expected
to be $52,000. The machine will be depreciated on a straight-line basis over a 10-year life with
no estimated salvage value. The company has a 40% tax rate. What is the annual operating cash
flow?
$64,800
$96,000
$86,800
$118,000
Some other answers
Solution
Answer is $86,800. Calculations given below:
First we will calculate profit after tax (PAT) and then add back non cash expenses that is
depreciation etc to get operating cash flow for an year:
Now, we calculate operating cash as below:
Calculation of
profit after tax
Sales 160000
Operating expenses -52000
Depreciation -55000 Machinery cost over 10 years
PBT 53000
tax@40% -21200
PAT 31800