The first quesiton asks for the operating cash flow in a particular year. I have always calculated this (in L2 Corp. Fin. context) as EBIT(1-t.r.) + depreciation. However, I got this question wrong because I was supposed to use EBIT(1-t.r.) + (depreciation x t.r.)
I don’t understand why in this instance I would use the depreciation tax shield value instead of just depreciation.
If anyone could shed some light on this I would be very appreciative. My confidence is severely waning today and a little clarification may help me greatly.
Because the original Formula for the after Tax Operating cash flow is - (S-C)*(1-T)+TD.
Whereas S-C # equals EBIT.
Solution:-
After-tax operating cash flow (CF) is calculated as follows:
They have not used EBIT instead they have subtracted Cash Operating expenses from the Sales.
First of all, thanks.
I understand what went wrong for me now. Ebit(1-t.r.) + depreciation would have gotten me the same answer as the Sales - Operating expenses… formula. CFAI got to the same answer using a different formula. The reason my answer was incorrect is because I was subtracting out the change in working capital for that year.
This leads me to a new quesion unfortunately. Why do we not subtract out the additional net working capital during that year like we do in the initial cash outlay? Are we supposed to assume the additional net working capital is accounted for in that year’s operating expenses?
Any Corp. Fin. white knights out there want to come to my rescue and answer my whole question?
I’ll accept a white squire who only helps with a small portion of the problem (wink wink).
This is what it has come to…