Operating Cash Flow

EXERCISE 01

Elettrica’s project adds year-1 sales €50,000 and cash operating costs €30,000. Equipment costs €150,000 and is depreciated straight-line over ten years. Corporate tax is 34%. No year-1 capital expenditure or NWC change is specified.

A.Calculate year-1 operating cash flow.

A.

OCF=(Sales-Costs-Dep)(1-T_c)+Dep

Dep=150000/10=15000,\quad EBIT=50000-30000-15000=5000

OCF=5000(1-0.34)+15000

€18,300.

Operating Cash Flow

EXERCISE 02

A project’s year-1 EBIT is −€400 after depreciation of €300. Interest expense is €250, the tax rate is 25%, and there is no NWC investment. No further year-1 capital expenditure is specified.

A.Calculate operating free cash flow and state the tax-loss assumption.

A.

OCF=EBIT(1-T_c)+Dep

OCF=(-400)(1-0.25)+300

€0 if the tax loss provides an immediate €100 tax saving.

If the tax loss cannot be used currently, current tax is zero and OCF = −400 + 300 = −€100; any later loss-offset benefit must be valued separately. Exclude interest from operating FCF. The depreciation amount alone (€300) is not the cash-flow answer.