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    Effect of depreciation on operating cash flow

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    You are analyzing a project and have developed the following estimates. The depreciation is $7,600 a year and the tax rate is 34 percent. What is the worst case operating cash flow?

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    We can test all three cases to see which produces the lowest taxable income:

    Taxable income/(loss) = (Units sold*(sales price/unit - variable cos/unit))-fixed cost-depreciation
    Best case taxable income/(loss) = (3,100*($19-$12))-$8,200-$7,600
    Best case taxable income/(loss) = (3,100*$7)-$15,800
    Best case taxable income/(loss) = $21,700 - $15,800
    Best case taxable income/(loss) = ...

    Solution Summary

    This solution illustrates how to compute the effect of depreciation on operating cash flow in analyzing a project.

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