A firm in the third year of depreciating its only asset, which originally cost $ 177...

A firm in the third year of depreciating its only asset, which originally cost

$ 177 comma 000$177,000

and has a 5-year MACRS recovery period

, has gathered the following data relative to the current year's operations:

Accruals	$16,000
Current assets	110,000
Interest expense	14,200
Sales revenue	409,000
Inventory	69,800
Total costs before depreciation, interest and taxes	289,000
Tax rate on ordinary income	21%

a. Use the relevant data to determine the operating cash flow for the current year.

b. Explain the impact that depreciation, as well as any other noncash charges, has on a firm's cash flows.

Solutions

Expert Solution

Cost of the Ony Asset of the firm: $177,000

Particulars	Amount ($)
Sales	409,000
Cost	289,000
Profits	120,000
Cost of Debt	14,200
	105,800
Taxes (21%)	21160
Earnings after Tax (Cashflow for current year)	84,640

Since the only Asset of the firm purchased for $177,000 has the 5-year MACRS Recovery period, is currently in the 3rd year of Depreciation,
and the Depreciation that can be charaged would be 19.2%:
= 177,000 x0.192 = 37,170
So that deduction to the taxable earning would be = $105,000 - $37,170 = $67,830
So the tax liability will reduce to $67,830 x0.21 = $14,244.3 from $21,160 and hence the cashflows will increase from:
$84,640 + ($21,160-$14,244) = $91,556

jeff jeffy answered 1 year ago

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