Question

Edwards Electronics recently reported $11,250 of sales, $5,500 of operating costs other than depreciation, and $1,250 of depreciation. The company had no amortization charges, it had $3,500 of bonds that carry a 6.25% interest rate, and its federal-plus-state income tax rate was 35%. How much was its net cash flow?

Answer 1

The net cash flow for Edwards Electronics is calculated by determining the net income and then adding the non-cash depreciation expense. The net cash flow is $4,032.81.

Step-by-step explanation:

The student is asking how to calculate the net cash flow for Edwards Electronics given various financial data, including sales, operating costs, depreciation, interest on bonds, and the tax rate. To solve this, you would first calculate the earnings before interest and taxes (EBIT), then subtract the interest to get the taxable income. The taxes are then calculated and subtracted from the taxable income to find the net income. The net cash flow is then determined by adding back the non-cash expense (depreciation) to the net income.

Here's a step-by-step calculation:

1. Calculate EBIT: Sales - Operating Costs - Depreciation = $11,250 - $5,500 - $1,250 = $4,500.
2. Calculate Taxable Income: EBIT - Interest = $4,500 - ($3,500 x 6.25%) = $4,281.25.
3. Calculate Taxes: Taxable Income x Tax Rate = $4,281.25 x 35% = $1,498.44.
4. Calculate Net Income: Taxable Income - Taxes = $4,281.25 - $1,498.44 = $2,782.81.
5. Calculate Net Cash Flow: Net Income + Depreciation = $2,782.81 + $1,250 = $4,032.81.