The tax rate is 35 what is the operating cash flow

depreciation to a zero book value over the life of the project. The tax rate is 35%. What is the
operating cash flow for this project?
D. $33,000
Tax = .35  [$110,000 - 70,000 - ($80,000  4)] = $7,000; OCF = $110,000 - $70,000 -
$7,000 = $33,000
8-7

Chapter 08 - Making Capital Investment Decisions
50. Peter's Boats has sales of $760,000 and a profit margin of 5%. The annual depreciation
expense is $80,000. What is the amount of the operating cash flow if the company has no
long-term debt?
C. $118,000
OCF = ($760,000  .05) + $80,000 = $118,000
51. Le Place has sales of $440,000, depreciation of $32,000, and net working capital of
$56,000. The firm has a tax rate of 34% and a profit margin of 5%. The firm has no interest
expense. What is the amount of the operating cash flow?
C. $54,000
OCF = ($440,000  .05) + $32,000 = $54,000
OCF – TOP DOWN APPROACH
52. Ben's Border Café is considering a project which will produce sales of $16,000 and
increase cash expenses by $10,000. If the project is implemented, taxes will increase from
$23,000 to $24,500 and depreciation will increase from $4,000 to $5,500. What is the amount
of the operating cash flow using the top-down approach?
B. $4,500
OCF = $16,000 - $10,000 - ($24,500 - $23,000) = $4,500
53. Ronnie's Coffee House is considering a project that will produce sales of $7,000 and
increase cash expenses by $2,500. If the project is implemented, taxes will increase by
$1,400. The additional depreciation expense will be $1,000. An initial cash outlay of $3,000 is
required for net working capital. What is the amount of the operating cash flow using the top-
down approach?
D. $3,100
OCF = $7,000 - $2,500 - $1,400 = $3,100
OCF – TAX SHIELF APPROACH
54. A project will increase sales by $60,000 and cash expenses by $51,000. The project will
cost $40,000 and be depreciated using straight-line depreciation to a zero book value over the
4-year life of the project. The company has a marginal tax rate of 35%. What is the operating
cash flow of the project using the tax shield approach?
C. $9,350
OCF = [($60,000 - $51,000)  (1 -.35)] + [($40,000  4)  .35] = $9,350
55. A project will increase sales by $140,000 and cash expenses by $95,000. The project will
cost $200,000 and be depreciated using the straight-line method to a zero book value over the
5-year life of the project. The company has a marginal tax rate of 34%. What is the yearly
value of the depreciation tax shield?
B. $13,600
Depreciation tax shield = ($200,000  5)  .34 = $13,600
8-8

Chapter 08 - Making Capital Investment Decisions
MACRS
56. Sun Lee's Furniture just purchased some fixed assets classified as 5-year property for
MACRS. The assets cost $24,000. What is the amount of the depreciation expense for the
second year?
E. $7,680
Depreciation for year 2 = $24,000  .3200 = $7,680
57. You just purchased some equipment that is classified as 5-year property for MACRS. The
equipment cost $67,600. What will the book value of this equipment be at the end of three
years should you decide to resell the equipment at that point in time?
A. $19,468.80
Book value at the end of year 3 = $67,600 - [$67,600  (.20 + .32 + .192)] =
58. LiCheng's Enterprises just purchased some fixed assets that are classified as 3-year
property for MACRS. The assets cost $2,900. What is the amount of the depreciation expense
for year 4?