ABC Inc is considering purchase of a new equipment The expec

ABC, Inc., is considering purchase of a new equipment. The expected sales are expected to be $5,129,153. The annual cash operating expenses are expected to be $3,759,421. The annual depreciation is estimated to be $406,529 and the interest expense is estimated to be $179,173. If the tax rate is 27%, what is the operating cash flow?

Solution

Calculation of EBIT Particulars Amount Sales    51,29,153.00 Less: Operating Expenses -37,59,421.00 Less: Depreciation     -4,06,529.00 Earnings before interest and tax       9,63,203.00 Less: Interest     -1,79,173.00 Earnings before tax       7,84,030.00 Less: Tax@27%(784030*27%)     -2,11,688.10 Earnings after tax       5,72,341.90 Calculation of Operating Cash Flow - If interest expense is only booked as accrual but not paid during the year (or) Interest considered as financing cash flow. If interest expense is only booked as accrual but not paid during the year, then it is treated as non cash expense since cash outflow was not happened during the year. So it should be added back because it was dedcuted while calculating Earnings before tax. Also in few cases, interest expense will be considered as finance cashflow. So it will be considered under financing activities in some cases like loan taken for specific purposes unlike for working capital. Particulars Amount Earnings before tax       7,84,030.00 Add: Non Cash Expenses - Depreciation       4,06,529.00 Add: Non Cash Expenses - Interest       1,79,173.00 Less: Income Tax paid     -2,11,688.10 Cash flow from operating expenses    11,58,043.90 Calculation of Operating Cash Flow - If interest expense is only booked as accrual but paid during the year If interest expense is booked as accrual and also paid during the year, then there is a cash outflow. So no need to add back as non cash expense. It was already deducted while calculating Earnings before tax Particulars Amount Earnings before tax       7,84,030.00 Add: Non Cash Expenses - Depreciation       4,06,529.00 Less: Income Tax paid     -2,11,688.10 Cash flow from operating expenses       9,78,870.90