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Chapter 4: Q2BP (page 307)

Assume a corporation has earnings before depreciation and taxes of \(100,000, depreciation of \)40,000, and a 40 percent tax bracket.

  1. Compute its cash flow using the following format:

Earnings before depreciation and taxes

--

Depreciation

--

Earnings before taxes

--

Taxes @ 40%

--

Earnings after taxes

--

Depreciation

--

b. Compute the cash flow for the company if depreciation is only \(20,000.

c. How much cash flow is lost due to the reduced depreciation from \)40,000 to $20,000?

Short Answer

Expert verified

Answer

  1. Cash flow is$76,000.

  2. Cash flow is $68,000.

  3. Cash flow lost is $8,000.

Step by step solution

01

Definition of Depreciation Expenses

The non-cash expense representing the decline in the value of the fixed asset due to its wear and tear is known as depreciation expenses. It gets accumulated each year and reported in the balance sheet of the business entity.

02

Calculation of cash flow

Particular

Amount $

Earnings before depreciation and taxes

$100,000

Depreciation

(40,000)

Earnings before taxes

60,000

Taxes @ 40%

(24,000)

Earnings after taxes

36,000

Depreciation

40,000

Cash flow

$76,000

03

Calculation of cash flow when depreciation is $20,000

Particular

Amount $

Earnings before depreciation and taxes

$100,000

Depreciation

(20,000)

Earnings before taxes

80,000

Taxes @ 40%

(32,000)

Earnings after taxes

48,000

Depreciation

20,000

Cash flow

$68,000

04

Cash flow lost

Particular

Amount $

Cash flow when depreciation is 40,000

$76,000

Cash flow when depreciation is 20,000

(68,000)

Cash flow lost

$8,000

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Most popular questions from this chapter

Del Monty will receive the following payments at the end of the next three years: \(2,000, \)3,500, and \(4,500. Then from the end of the 4th year through the end of the 10th year, he will receive an annuity of \)5,000 per year. At a discount rate of 9 percent, what is the present value of all three future benefits?

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