A proposed expansion project is expected to increase sales by $74,300 and increase cash expenses by $46,900. The project will require $52,800 of fixed assets that will be depreciated using straight-line depreciation to a zero book value over the five-year life of the project. The store has a marginal tax rate of 23 percent. What is the operating cash flow of the project using the tax shield approach? Ignore bonus depreciation.
A) $11,114.40
B) $17,916.60
C) $23,526.80
D) $22,800.10
E) $14,098.20

Question

Quizplus · Accepted Answer

Operating cash flow using tax shield approach = (Operating income + Depreciation)x(1-T)
- Operating Income = Increase in sales - Increase in cash expenses
- Operating Income = $74,300 - $46,900
- Operating Income = $27,400

- Depreciation = Fixed assets / Life of the project
- Depreciation = $52,800 / 5
- Depreciation = $10,560

- Tax Shield = Depreciation x T
- Tax Shield = $10,560 x 0.23
- Tax Shield = $2,425.20

- Operating cash flow using tax shield approach = ($27,400 + $10,560) x (1-0.23) + $2,425.20
- Operating cash flow using tax shield approach = $23,526.80

Therefore, the best choice is C as it is the operating cash flow using tax shield approach.

A Proposed Expansion Project Is Expected to Increase Sales by $74,300