Last year Tiemann Technologies reported $10,500 of sales, $6,250 of operating costs other than depreciation, and $1,300 of depreciation. The company had no amortization charges, it had $5,000 of bonds that carry a 6.5% interest rate, and its federal-plus-state income tax rate was 35%. This year's data are expected to remain unchanged except for one item, depreciation, which is expected to increase by $750. By how much will net after-tax income change as a result of the change in depreciation? The company uses the same depreciation calculations for tax and stockholder reporting purposes.
Select the correct answer.
Now we need to compute the change in net income due to the increase in depriciation
we have the following
|Particulars||Last Year (Amount in $)||This Year (Amount in $)|
|Operating Cost Other than Depriciation (B)||6250||6250|
|EBIT (D = A- B- C)||2950||2200|
|Bonds Value (E)||5000||5000|
|Interest Rate on Bonds (F)||6.50%||6.50%|
|Ineterest Expense (G = E x F)||325||325|
|PBT (H = D - G)||2625||1875|
|Tax (I = H x 35 %)||918.75||656.25|
|Profit after Tax / Net Income ( J = H -I)||1706.25||1218.75|
The change in Net after Tax income = $ 1706.25 - 1218.75 = $ 487.5
The same can also be computed using the below formula
Change in after tax net profit = Increase in Depriciation x (1-Tax Rate)
Change in after tax net profit = $ 750 x (1-0.35)
Change in after tax net profit = $ 487.5
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