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In: Finance

What would happen to net income and cash flow if depreciation were increased by $1 million?

Butterfly Tractors had $14 million in sales last year. Cost of goods sold was $8.00 million, depreciation expense was $2 million, interest payment on outstanding debt was $1 million, and the firm’s tax rate was 35%.

What would happen to net income and cash flow if depreciation were increased by $1 million? (Enter your numeric answers in millions rounded to 2 decimal places. Select "unaffected" if the results do not affect the balance.)

Expert Solution

Current net Income = (Sales - Cost of goods sold - depreciation - interest)*(1-tax rate)

= (14 - 8 - 2 - 1)*(1-0.35)

= 3*0.65

=$1.95 million

Cash flow = Net Income + depreciation

=1.95 +2

=$3.95 million

Now if depreciation increased by $1 million

so new depreciation = 2+1 = 3 million

new net income = (14-8-3-1)*0.65

=2*0.65 = $1.3 million

hence net income reduced by 0.65 million

Cash flow = 1.3 + 3 = $4.3 million

Hence cash flow increased by $0.35 million

jeff jeffy answered 2 years ago

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