Question

Coolidge Cola is forecasting the following income statement: Sales $30,000,000 Operating costs excluding depr and amort 20,000,000 EBITDA $10,000,000 Depreciation and amortization 5,000,000 Operating income (EBIT) $ 5,000,000 Interest expense 2,000,000 Taxable income (EBT) $ 3,000,000 Taxes (40%) 1,200,000 Net income $ 1,800,000 Assume that depreciation is Coolidge's only non-cash revenue or expense. Congress is considering a proposal allowing companies to depreciate their equipment at a faster rate. If approved, Coolidge's new depreciation expense would be $8,000,000, although there would be no effect on the economic value of the company's equipment, nor would it affect the company's tax rate, which would remain at 40%. If this proposal were implemented, what would be the company's net cash flow

Answer 1

new net cash flow = $8,000,000

Step-by-step explanation:

Current net cash flow before any change approved by Congress = net income + deprecaition expense = $1,800,000 + $5,000,000 = $6,800,000

Cash flow after Congress approves change = net income + new depreciation expense:

taxable income = $10,000,000 - $8,000,000 - $2,000,000 = $0

deprecaitione xpense = $8,000,000

new net cash flow = $8,000,000