Question

A firm reports Net Income of $21,000 with a tax rate of 30%. It pays interest in the amount of $10,000. Its net profit margin is 7% and its costs are $160,000, not including depreciation.

Calculate depreciation.

Calculate the operating cash flow.

The firm’s last balance sheet showed net fixed assets of $500,000 and the current balance sheets shows net fixed assets of $500,000. What was the company’s net capital spending this year?

Answer 1

Given :
Net Income Amt $	$              21,000
Net Profit Margin %=Net Income/Sales =	7%
Sales =Net Income $/Net Profit Margin %=	300,000
Cost excluding Depreciation =	160,000
Interest Cost	10,000
Tax rate =	30%
Assume Depreciation expense =	D
Now , Taxable Income =Revenue less all costs
=300,000-160,000-D-10,000
Net Income =After Tax Income =Taxable Income *(1-30%)
so . (300,000-160,000-D-10,000)*70%=21,000
or, (130,000-D)*0.70=21,000
or, 91,000-D*0.7=21,000
D=100,000
So Depreciation is $100,000
Operating Cash flow Calculation
Net Income =	$              21,000
Add Depreciation =	$           100,000
Total Operating Cash flow =	$          121,000
Capital Spending Calculation
Opening Balance Net Fixed Assets	$           500,000
Less : Current Year Depreciation expense	$          (100,000)
Assume Capital Spending for the year = A
Given , Closing balance of net Fixed Asset =	500,000
So, 500,000+(100,000)+A=500,000
A= 100,000
So Capital Investment for the year=	$           100,000