Kurt’s Kabinets is looking at a project that will require $80,000 in fixed assets and another
$20,000 in net working capital. The project is expected to produce sales of $110,000 with
associated costs of $70,000. The project has a 4-year life. The company uses straight-line
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?
A. $7,000
B. $13,000
C. $27,000
D. $33,000
E. $40,000
Tax = .35 [$110,000 – 70,000 – ($80,000 4)] = $7,000; OCF = $110,000 – $70,000 – $7,000 =
$33,000
Ronnie’s Coffee House is considering a project which will produce sales of $6,000 and increase
cash expenses by $2,500. If the project is implemented, taxes will increase by $1,300. The
additional depreciation expense will be $1,000. An initial cash outlay of $2,000 is required for
net working capital. What is the amount of the operating cash flow using the top-down
approach?
A. $200
B. $1,500
C. $2,200
D. $3,500
E. $4,200
