Question
In: Finance
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 | |||||||
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