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14 November, 15:42

How should you use operating costs when calculating incremental cash flows?

Group of answer choices:

A. Do not subtract operating costs, and then subtract taxes on operating income before operating costs.

B. Subtract operating costs.

C. Subtract taxes as though operating costs were not tax-deductible.

D. Then subtract operating costs. Subtract operating costs, calculate taxes off of that number, and then add them back.

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Answers (1)
  1. 14 November, 16:09
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    Subtract operating costs, calculate taxes off of that number, and then add them back.

    Explanation:

    The computation of the operating cash flow is shown below:

    = Earning before interest and taxes + Depreciation - Income tax expense

    where,

    Earning before interest and taxes = Sales - cost of good sold - depreciation expense

    While calculating the incremental cash flows we deduct the operating cost, depreciation, tax expense and then added back the depreciation expense as it is a non cash expense
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