$ 6,000

+ Depreciation


- Taxes


Operating cash flow


So our aftertax operating cash flow is $19,960.

It might be somewhat more enlightening to calculate operating cash flow using a different approach. What is actually going on here is very simple. First, the cost savings increase our pretax income by $22,000. We have to pay taxes on this amount, so our tax bill increases by .34 X $22,000 = $7,480. In other words, the $22,000 pretax saving amounts to $22,000 X (1 - .34) = $14,520 after taxes.

Second, the extra $16,000 in depreciation isn't really a cash outflow, but it does reduce our taxes by $16,000 X .34 = $5,440. The sum of these two components is $14,520 + 5,440 = $19,960, just as we had before. Notice that the $5,440 is the depreciation tax shield we discussed earlier, and we have effectively used the tax shield approach here.

We can now finish off our analysis. Based on our discussion, the relevant cash flows are:


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