Last year, Michelson Manufacturing reported $10,250 of sales, $3,500 of operating costs other than depreciation, and...

Last year, Michelson Manufacturing reported $10,250 of sales, $3,500 of operating costs other than depreciation, and $1,250 of depreciation. The company had no amortization charges, it had $3,500 of bonds outstanding that carry a 6.5% interest rate, and its federal-plus-state income tax rate was 21%. This year's data are expected to remain unchanged except for one item, depreciation, which is expected to increase by $725. By how much will the depreciation change cause the firm's net after-tax income and its net cash flow to change? Note that the company uses the same depreciation calculations for tax and stockholder reporting purposes.

Answer choices:

A; -$383.84; $206.68

B; -$572.75; $152.25

C; -$471.25; $253.75

D; -$404.04; $217.56

E; -$447.69; $241.06

Solutions

Expert Solution

The increase in depreciation by $725 would reduce net income and increase cash flow

Reduction in net income after taxes	-725*(1-Tax rate)
Reduction in net income after taxes	-725*(1-0.21)
Reduction in net income after taxes	-$572.75

Increase in cash flow	725*21%
Increase in cash flow	$152.25

Thus, increase in depreciation would reduce net income after taxes by -$572.75 and increase cash flow by $152.25

jeff jeffy answered 2 years ago

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