Question

The Berndt Corporation expects to have sales of $13 million. Costs other than depreciation are expected to be 60% of sales, and depreciation is expected to be $2.6 million. All sales revenues will be collected in cash, and costs other than depreciation must be paid for during the year. Brendt's federal-plus-state tax rate is 35%. Berndt has no debt. The data has been collected in the Microsoft Excel Online file below. Open the spreadsheet and perform the required analysis to answer the questions below.

Open spreadsheet

1. Set up an income statement. What is Berndt's expected net cash flow? Enter your answer in dollars. For example, an answer of $1.2 million should be entered as 1,200,000. Round your answer to the nearest dollar.

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2. Suppose Congress changed the tax laws so that Berndt's depreciation expenses doubled. No changes in operations occurred. What is Berndt's expected net cash flow? Round your answer to the nearest dollar.

   $  

3. Now suppose that Congress changed the tax laws such that, instead of doubling Berndt’s depreciation, it was reduced by 50%. What is Berndt's expected net cash flow? Round your answer to the nearest dollar.

   $  

4. If this were your company, would you prefer Congress to cause your depreciation expense to be doubled or halved?

Answer 1

a.

Therefore, Berndt's Expected net cash flow is 4,290,000 .

b.

Therefore, Berndt's Expected net cash flow is 5,200,000 .

C.

Therefore, Berndt's Expected net cash flow is 3,835,000 .

D.

as we can see from the above 3 excel sheets. the net cash flow increased and tax reduced when depreciation was doubled both of which are favorable.

Therefore I would prefer Congress to cause my depreciation expense to be doubled.