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9 November, 15:20

Northern Organic Farms is considering a project which will produce annual sales of $975,000 and increase cash expenses by $848,000. If the project is implemented, taxes will increase from $141,000 to $154,000 and depreciation will increase from $194,000 to $272,000. The company is debt-free. What is the amount of the operating cash flow using the top-down approach?

a. $25,000

b. $114,000

c. $157,000

d. $181,000

e. $209,000

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  1. 9 November, 18:02
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    B) $114,000

    Explanation:

    To calculate the operating cash flows using the top down approach we can use the following equation:

    operating cash flow = increase in total sales - increase in total expenses - increase in taxes paid

    operating cash flow = $975,000 - $848,000 - ($154,000 - $141,000) = $975,000 - $848,000 - $13,000 = $114,000

    I didn't include depreciation since it is normally included to calculate the increase in taxes but taxes were already given.
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