Last year Almazan Software reported $10.500 million of sales, $6.250 million of operating costs other than...

Last year Almazan Software reported $10.500 million of sales, $6.250 million of operating costs other than depreciation, and $1.300 million of depreciation. The company had $5.000 million of bonds that carry a 6.5% interest rate, and its federal-plus-state income tax rate was 25%. This year's data are expected to remain unchanged except for one item, depreciation, which is expected to increase by $0.670 million. By how much will net income change as a result of the change in depreciation? The company uses the same depreciation calculations for tax and stockholder reporting purposes. (Round your final answer to 3 decimal places.)

a. -$0.388

b. -$0.479

c. -$0.444

d. -$0.436

e. -$0.503

Expert Solution

Correct answer is e. -$ 0.503

Working

Particulars	Amount (In $'s Millions)	Proposed Amount (In $'s Millions)
Sales	10.500	10.500
Less: Operating Cost other than Depreciation	6.250	6.250
Earnings before Interest Tax & Depreciation (EBITDA)	4.250	4.250
Less: Depreciation	1.300	1.970
Earnings before Interest & Tax (EBIT)	2.950	2.280
Less : Interest ( 5.000* 6.5%)	0.325	0.325
Earnings before Tax (EBT)	2.625	1.955
Less : Tax @25%	0.656	0.489
Earnings after Tax (EAT)	1.969	1.466

Net Income Changes = $1.466 - $1.969 = -$0.503

jeff jeffy answered 2 years ago

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