Question

Assume a corporation has earnings before depreciation and taxes of $125,000, depreciation of $40,000, and that it has a 30 percent tax bracket.

a. Compute its cash flow using the following format. (Input all answers as positive values.)

25,487 answers

PArticulars | Amount($) |

earnings before depreciation and taxes | |

Less:depreciation | |

Earnings before tax | |

Less:tax@30% | |

Net income |

b. How much would cash flow be if there were only $15,000 in depreciation? All other factors are the same. c. How much cash flow is lost due to the reduced depreciation from $40,000 to $15,000?

Answer #1

a.

Earnings before depreciation and taxes | 125000 |

Less:depreciation | (40000) |

Earnings before taxes | $85000 |

Less:tax@30% | $25500 |

Net income | $59500 |

Hence cash flow=Net income+Depreciation

=(59500+40000)=**$99500**

b.

Earnings before depreciation and taxes | 125000 |

Less:depreciation | (15000) |

Earnings before taxes | $110000 |

Less:tax@30% | $33000 |

Net income | $77000 |

Hence cash flow=Net income+Depreciation

=(77000+15000)=**$92000**

**c.Hence cash flow lost=(99500-92000)=$7500**

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A.
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B.
Because taxes should not be paid.
C.
Because higher taxes lead to higher operating cash flow.
D.
Because taxes are paid in cash to the Internal Revenue
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