A firm in the third year of depreciating its only asset, which originally cost $180,000 and has a 5-year MACRS recovery period, has gathered the following data relative to the current year's operations:
Accruals .......................................................................... $ 15,000
Current assets ................................................................... 120,000
Interest expense ................................................................ 15,000
Sales revenue .................................................................... 400,000
Inventory ........................................................................... 70,000
Total costs before depreciation, interest, and taxes ....... 290,000
Tax rate on ordinary income ............... 40%
a. Use the relevant data to determine the operating cash flow (see Equation 4.2) for the current year.
b. Explain the impact that depreciation, as well as any other noncash charges, has on a firm's cash flows.