Question

The Berndt corporation expects to have sales of $12 million. Costs other than depreciation are expected to be 75% of sales, and depreciation is expected to be $1.5 million. All sales revenue will be collected in cash, and costs other than depreciation must be paid for during the year. Berndt's federal-plus-state tax rate is 40%. Berndt has no debt.

A. Set up an income statement. What is Berndt's expected net cash flow?

B. Suppose congress changed the tax laws so that Berndt's depreciation expenses doubled. No changes in operational occurred. what would happen to reported profit and to net cash flow?

C. Now suppose that congress changed the tax laws such that, instead of doubling Berndt's depreciation, it was reduced by 50%. How would profit and net cash flow be affected?

D. If this were your company, would you prefer Congress to cause your depreciation expense to be doubled or halved? Why?

Answer 1

A)

net income: 900,000

cash flow: 2,400,000

B)

net income: zero

cash flow 3,000,000

C)

net income: 1,350,000

cash flow: 2,100,000

D)

I would prefer to doubled it, thus having more time cash available in the present. In the end, the amount of depreciation for the assets will be the same, but we must consider the time value of money thus, is better to have the cash in the present than in the future.

Step-by-step explanation:

saes 12,000,000

cost of goods sold: (9,000,000)

gross profit 3,000,000

depreciation expense (1,500,000)

earning before taxes: 1,500,000

tax income: (600,000)

net income 900,000

cash flow: 900,000+ 1,500,000 dep = 2,4000

if depreciation expense doubled:

earning before taxes: 0

cash flow: 0 + 3,000,000 = 3,000,000

if depreciacion halved:

earning before taxes: 2,250,000

tax income: (900,000)

net income: 1,350,000

cash flow: 1,350,000 + 750,000 = 2,100,000