Question

# Assume a corporation has earnings before depreciation and taxes of \$125,000, depreciation of \$40,000, and that...

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.)

 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?

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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