Question

For 2017, Company XYZ reported \$9000 of sales, \$6000 of operating cost other than depreciation, and...

For 2017, Company XYZ reported \$9000 of sales, \$6000 of operating cost other than depreciation, and \$1500 of depreciation. The company has no amortization charges, it had \$280 in interest expense, and its corporate tax rate was 35%. 2018 data are expected to remain unchanged except for one item, depreciation, which is expected to increase by \$839. By how much will net income change as a result of the change in depreciation?
Enter your answer as a number with 2 decimal places of precision.( i.e. 1.23)

 2017 2018 Sales 9000 9000 (Operating cost) 6000 6000 EBITDA 3000 3000 (Depreciation) 1500 2339 EBIT 1500 661 (Interest expense) 280 280 PBT 1220 381 Tax (@35%) 427 133.35 PAT 793 247.65 Change in Net Income -545.35

While EBIT decreases by as much as \$839 due to increase in Depreciation expense, the Net Income falls only by \$545.35 because of the effect of Tax Shield on Depreciation expense.

Value of Tax Shield = Tax rate*(Increase in Depreciation) = 35%*\$839 = \$293.65

Hence, net income falls by (Increase in depreciation expense - value of tax shield) = \$839 - \$293.65 = \$545.35

Earn Coins

Coins can be redeemed for fabulous gifts.