Question

The Rogers Corporation has a gross profit of $784,000 and $314,000 in depreciation expense. The Evans Corporation also has $784,000 in gross profit, with $48,900 in depreciation expense. Selling and administrative expense is $200,000 for each company.

Required:
a. Given that the tax rate is 40 percent, compute the cash flow for both companies.
b. Calculate the difference in cash flow between the two firms.

Answer 1

Particulars Rogers Evans

Gross profit 784,000 784,000

(-) Selling and admin expenses (200,000) (200,000)

(-) Depreciation (314,000) (48,900)

EBT 270,000 535,100

(-) Taxes at 40% (108,000) (214,040)

EAT 162,000 321,060

(+) Depreciation 314,000 48,900

Cash flows 476,000 369,960

Difference in cash flows = $476,000 - $369,960

Difference in cash flows = $ 106,040