Stanton Inc. is considering the purchase of a new machine, which will reduce manufacturing costs by $5,000 annually and increase earnings before depreciation and taxes by $6,000 annually. Stanton will use the MACRS method to depreciate the machine, and it has estimated the depreciation expense for the first year as $8,000. Which of the following is the supplemental operating cash flow for the first year if Stanton's marginal tax rate is 40 percent?a.$40,000b.$15,000c.$9,800d.$4,500e.$23,000

By deducting operating expenses from total revenues, operating cash flow (OCF), also known as cash flow from operations, is a computation of business efficiency that determines how much cash is generated by a company's main operations and commercial activities. In essence, it displays the amount of cash flow produced by business activities alone, without taking into account any supplemental income from investments or secondary sources of income like interest.

CALCULATION:

We have:

EBITDA = 6000

Depreciation = 8000

t = 40%

we can use following formula to calculate the operating cash flow:

Operating cash flow = Reduction in manufacturing overheads x(1-t) +EBITDA x (1-t) + Depreciation x t

=5000 x (1-0.40) $6000 x (1-0.40) + 8000 x 0.40

= $3000 +$3600 + $3200

= $9800

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