Chapter 4 Question 2

Depreciation and accounting cash flow

A firm in the third year of depreciating its only asset, which originally cost $186,000 and has a 5-year MACRS recovery period has gathered the following data relative to the current year's operations:

Rounded Depreciation Percentages by Recovery Year Using MACRS for

First Four Property Classes

Percentage by recovery year*

Recovery Year	3 years	5 years	7 years	10 years
1	33%	20%	14%	10%
2	15%	32%	25%	18%
3	15%	19%	18%	14%
4	7%	12%	12%	12%
5		12%	9%	9%
6		5%	9%	8%
7			9%	7%
8			4%	6%
9				6%
10				6%
11				4%
Totals	100%	100%	100%	100%

Accruals	$14,300
Current assets	122,000
Interest expense	14,200
Sales revenue	413,000
Inventory	69,600
Total costs before depreciation, interest and taxes	287,000
Tax rate on ordinary income	21%

a. Use the relevant data to determine the operating cash flow for the current year.

b. Explain the impact that depreciation, as well as any other noncash charges, has on a firms cash flows.

For Example, the answer for a. should include the following information

a. Complete the following table to determine the operating cash flow (OCF):(Round to the nearest dollar.)

Operating Cash Flow
Sales revenue	$
Less: Total costs before depreciation, interest, and taxes
Depreciation expense
Earnings before interest and taxes	$
Less: Taxes at 21%
Net operating profit after taxes (NOPAT)	$
Plus: Depreciation
Operating Cash Flow (OCF)	$