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.