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A project is expected to generate annual revenues of $131,300, with variable costs of $79,900, and fixed costs of $20,400. The annual depreciation is $4,700 and the tax rate is 34 percent. What is the annual operating cash flow?

Question

A project is expected to generate annual revenues of 131,300,withvariablecostsof131,300, with variable costs of 79,900, and fixed costs of 20,400.Theannualdepreciationis20,400. The annual depreciation is 4,700 and the tax rate is 34 percent. What is the annual operating cash flow?

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Solution

To calculate the annual operating cash flow, we need to follow these steps:

  1. Calculate the total costs: Add the variable costs and the fixed costs. Total costs = Variable costs + Fixed costs Total costs = 79,900+79,900 + 20,400 = $100,300

  2. Calculate the earnings before interest and taxes (EBIT): Subtract the total costs from the annual revenues. EBIT = Annual revenues - Total costs EBIT = 131,300131,300 - 100,300 = $31,000

  3. Calculate the earnings before taxes (EBT): Subtract the annual depreciation from the EBIT. EBT = EBIT - Depreciation EBT = 31,00031,000 - 4,700 = $26,300

  4. Calculate the net income: Multiply the EBT by (1 - Tax rate). Net income = EBT * (1 - Tax rate) Net income = 26,300(10.34)=26,300 * (1 - 0.34) = 17,358

  5. Calculate the operating cash flow: Add the net income and the depreciation. Operating cash flow = Net income + Depreciation Operating cash flow = 17,358+17,358 + 4,700 = $22,058

So, the annual operating cash flow is $22,058.

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