Please see the attached file.
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?© BrainMass Inc. brainmass.com November 30, 2021, 5:19 am ad1c9bdddf
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) = ...
This solution illustrates how to compute the effect of depreciation on operating cash flow in analyzing a project.