Assume a firm has earnings before depreciation and taxes of $520,000 and no depreciation. It is...

Assume a firm has earnings before depreciation and taxes of $520,000 and no depreciation. It is in a 35 percent tax bracket.

a. Compute its cash flow.

b. Assume it has $520,000 in depreciation. Recompute its cash flow.

c. How large a cash flow benefit did the depreciation provide?

Expert Solution

a)
Earning before depreciation and tax	5,20,000.00
less depreciation	0
Earning before tax	5,20,000.00
Less Tax at 30%	1,56,000.00
Earning after tax	3,64,000.00
Add Depreciation	0
Cash flow	3,64,000.00
b)
Earning before depreciation and tax	5,20,000.00
less depreciation	-5,20,000.00
Earning before tax	0
Less Tax at 30%	0
Earning after tax	0
Add Depreciation	5,20,000.00
Cash flow	5,20,000.00

c)
Cash flow provided by depreciation = $520000-364000
=$156000

jeff jeffy answered 3 years ago

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