3.
We need to construct a basic income statement. The income statement is:
Sales
$
830,000
Variable costs
498,000
Fixed costs
181,000
Depreciation
77,000
EBT
$
74,000
Taxes@35%
25,900
Net income
$
48,100
4.
To find the OCF, we need to complete the income statement as follows:
Sales
$
824,500
Costs
538,900
Depreciation
126,500
EBT
$
159,100
Taxes@34%
54,094
Net income
$
105,006
The OCF for the company is:
OCF = EBIT + Depreciation – Taxes
OCF = $159,100 + 126,500 – 54,094
OCF = $231,506
The depreciation tax shield is the depreciation times the tax rate, so:
Depreciation tax shield = t
c
Depreciation
Depreciation tax shield = .34($126,500)
Depreciation tax shield = $43,010
The depreciation tax shield shows us the increase in OCF by being able to expense
depreciation.
5.
To calculate the OCF, we first need to calculate net income. The income statement is:
Sales
$
108,000
Variable costs
51,000
Depreciation
6,800
EBT
$
50,200
Taxes@35%
17,570
Net income
$
32,630
Using the most common financial calculation for OCF, we get:
OCF = EBIT + Depreciation – Taxes
OCF = $50,200 + 6,800 – 17,570
OCF = $39,430