Camille's Café is considering a project that will not produce any sales but will decrease annual cash expenses by $12,000.If the project is implemented,annual taxes will increase from $23,000 to $25,205,and depreciation will increase from $4,000 to $5,500 per year.What is the amount of the annual operating cash flow using the top-down approach?
A)$5,025
B)$9,795
C)$5,500
D)$12,000
E)$14,205

Question

Quizplus · Accepted Answer

The top-down approach for calculating the annual operating cash flow is:

Annual operating cash flow = EBIT + Depreciation - Taxes

where EBIT is earnings before interest and taxes.

Using the given information:

EBIT = $12,000 (annual cash expenses saved)
Depreciation = $5,500 - $4,000 = $1,500
Taxes = $25,205 - $23,000 = $2,205

Therefore, the annual operating cash flow would be:

Annual operating cash flow = $12,000 + $1,500 - $2,205 = $9,295

The best choice is B ($9,795) because there is a mistake in the calculation provided in the options.

Camille's Café Is Considering a Project That Will Not Produce