Question

Butterfly Tractors had $21.00 million in sales last year. Cost of goods sold was $9.40 million, depreciation expense was $3.40 million, interest payment on outstanding debt was $2.40 million, and the firm’s tax rate was 35%. a.What were the firm’s net income and net cash flow? (Enter your answers in millions rounded to 2 decimal places.) Net income$ million Net cash flow$ million b.What would happen to net income and cash flow if depreciation were increased by $2.40 million? (Input all amounts as positive values. Enter your answers in millions rounded to 2 decimal places.) Net income by$ million Cash flow by$ million

Answer 1

The firm's original net income was $3.77 million and net cash flow was $7.17 million. If depreciation increased by $2.40 million, net income would decrease to $2.21 million, lowering by $1.56 million, while net cash flow would increase to $8.01 million, rising by $0.84 million.

Step-by-step explanation:

To calculate the firm's net income and net cash flow, we will first compute the net income by subtracting all expenses and taxes from sales. Then we will add back non-cash expenses like depreciation to determine the net cash flow.

Part a: Original Calculations

Net Income Calculation:

• Sales: $21.00 million
• Cost of Goods Sold (COGS): $9.40 million
• Depreciation Expense: $3.40 million
• Interest Payment: $2.40 million
• Earnings Before Tax (EBT) = Sales - COGS - Depreciation Expense - Interest Payment
• Earnings Before Tax (EBT) = $21.00 million - $9.40 million - $3.40 million - $2.40 million
• Earnings Before Tax (EBT) = $5.80 million
• Tax (35%) = $5.80 million ×35% = $2.03 million
• Net Income = EBT - Tax
• Net Income = $5.80 million - $2.03 million
• Net Income = $3.77 million

Net Cash Flow Calculation:

• Net Cash Flow = Net Income + Depreciation Expense (since it's a non-cash charge)
• Net Cash Flow = $3.77 million + $3.40 million
• Net Cash Flow = $7.17 million

Part b: Adjusted Calculations with Increased Depreciation

If the depreciation were increased by $2.40 million, it would affect both net income and cash flow:

• New Depreciation Expense = $3.40 million + $2.40 million = $5.80 million
• New Earnings Before Tax (EBT) = $21.00 million - $9.40 million - $5.80 million - $2.40 million = $3.40 million
• New Tax (35%) = $3.40 million ×35% = $1.19 million
• New Net Income = EBT - Tax
• New Net Income = $3.40 million - $1.19 million
• New Net Income = $2.21 million
• Decrease in Net Income due to increased depreciation = $3.77 million - $2.21 million = $1.56 million
• New Net Cash Flow = New Net Income + New Depreciation Expense
• New Net Cash Flow = $2.21 million + $5.80 million
• New Net Cash Flow = $8.01 million
• Change in Cash Flow = New Net Cash Flow - Original Net Cash Flow
• Change in Cash Flow = $8.01 million - $7.17 million = $0.84 million

Answer 2

a. The firm’s net income and net cash flow is $3.77 million and $7.17 million respectively

b. The firm’s net income and net cash flow is $2.21 million and $8.01 million respectively

Step-by-step explanation:

a. The computation of the net income is shown below:

= Sales - cost of good sold - depreciation expense - interest expense - income tax expense

where,

Income tax expense = (Sales - cost of good sold - depreciation expense - interest expense) × income tax rate

= ($21.00 million - $9.40 million - $3.40 million - $2.40 million) × 35%

= $2.03 million

The other items values would remain the same

Now put these values to the above formula

So, the value would equal to

= $21.00 million - $9.40 million - $3.40 million - $2.40 million - $2.03 million

= $3.77 million

And the net cash flow = Net income + depreciation expense

= $3.77 million + $3.40 million

= $7.17 million

b. The computation of the change in the net income is shown below:

= Sales - cost of good sold - increased depreciation expense - interest expense - income tax expense

where,

Income tax expense = (Sales - cost of good sold - increased depreciation expense - interest expense) × income tax rate

= ($21.00 million - $9.40 million - $5.80 million - $2.40 million) × 35%

= $1.19 million

The other items values would remain the same

Now put these values to the above formula

So, the value would equal to

= $21.00 million - $9.40 million - $5.80 million - $2.40 million - $1.19 million

= $2.21 million

And the net cash flow = Net income + increased depreciation expense

= $2.21 million + $5.80 million

= $8.01 million