Question

Suppose a​ firm's tax rate is 35 %.

a. What effect would a $ 10.26 million operating expense have on this​ year's earnings? What effect would it have on next​ year's earnings?

b. What effect would nbsp a $ 7.85 million capital expense have on this​ year's earnings if the capital is depreciated at a rate of  $ 1.57 million per year for five​ years? What effect would it have on next​ year's earnings? ​(Round to two decimal​ places, and use a negative number for a​ decline.)

Answer 1

a) The amount of $ 10 million would be immediately expensed. The effect on earnings would be decrease in earnings by $ - 6,669,000 or -6.669 million (rounded to -6.67 million) [-10,260,000(1-.35)] .

There will be no effect on next year earnings since the same was expensed in last year.

b)Capital expense never effect the earnings directly .However depreciation charged on such capital asset forms the part of operating expense .

Earnings would declined by -1570000[1-.35] = $ - 1020500 for each of the next 5 years or - 1.0205 million (rounded to -1.02 million)

Effect on next year earnings would be decline in earnings by -1020500 or -1.02 million