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Sam's Sports Bar wants to expand their facility. The expansion will require $330,000 in building improvements,...

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Finance

Sam's Sports Bar wants to expand their facility. The expansionwill require $330,000 in building improvements, which will bedepreciated on a straight-line basis over a 20-year period. Theexpanded area is expected to generate $120,000 in additional salesof which 60 percent is variable cost. The fixed costs are $10,000annually and the tax rate is 35 percent. What is the operating cashflow for the first year of this project?

a.

$40,200

b.

$36,895

c.

$30,475

d.

$24,700

e.

$27,025

Answer & Explanation Solved by verified expert
4.4 Ratings (912 Votes)

c.

$30,475

Working:

Calculation of operating cash flow in year 1:
Sales $       1,20,000
Variable cost             -72,000
Contribution Margin               48,000
Fixed cost other than depreciation expense             -10,000
Depreciation Expense             -16,500
Profit Before Tax               21,500
Tax Expense                -7,525
Net Income               13,975
Depreciation Expense               16,500
Operating Cash flow $           30,475
Working:
Straight line depreciation = Cost of Building / Useful Life of project
= 330000/20
= $           16,500
variable cost = Sales *60%
= 120000*60%
= $           72,000
Tax Expense = Profit before tax * Tax Expense
=               21,500 * 35%
=                 7,525

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Transcribed Image Text

Sam's Sports Bar wants to expand their facility. The expansionwill require $330,000 in building improvements, which will bedepreciated on a straight-line basis over a 20-year period. Theexpanded area is expected to generate $120,000 in additional salesof which 60 percent is variable cost. The fixed costs are $10,000annually and the tax rate is 35 percent. What is the operating cashflow for the first year of this project?a.$40,200b.$36,895c.$30,475d.$24,700e.$27,025

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