Assume a corporation has earnings before depreciation and taxes of $90,000, depreciation of $35,000, and that...

Assume a corporation has earnings before depreciation and taxes of $90,000, depreciation of $35,000, and that it has a 40% combined tax bracket. What are the after-tax cash flows for the company?

Multiple Choice

$68,000
$62,800
$72,600
$71,800

Expert Solution

The after tax cash flow is calculated using two steps as below:

Earnings after Tax = Earnings before depreciation and taxes – Depreciation – Tax

= $90,000 - $35,000 – $22,000*

= $33,0000

*(40%*55,000)

After tax cash flow= Earnings after Tax + Depreciation

= $33,000 + $35,000

= $68,000.

Depreciation is added back here since it is a non-cash expense.

Hence, the answer is option a.

In case of any query, kindly comment on the solution.

jeff jeffy answered 8 months ago

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