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.

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