Question

Assume a corporation has earnings before depreciation and taxes of $100,000, depreciation of $40,000, and a 24 percent tax bracket a. Compute its cash flow using the following format. Earnings before depreciation and taxes Deprociation Eamings beflore taxes Taxes Earnings aftor taxes Depreciation Cash Soww b. Compute the cash flow for the company if depreciation is only $20,000. All other factors are the same. Cash flow

Answer 1

1)

Earnings before depreciation and taxes = 100,000

Depreciation = ( 40,000)

Earnings before taxes = 60,000

Taxes = 0.24 * 60,000 = (14,400)

Earnings after taxes = 45,600

Depreciation = 40,000

Cash flow = 85,600

2)

If dep was only 20,000:

Earnings before depreciation and taxes = 100,000

Depreciation = ( 20,000)

Earnings before taxes = 80,000

Taxes = 0.24 * 80,000 = (19,200)

Earnings after taxes = 60,800

Depreciation = 20,000

Cash flow = 80,800

c)

Cash flow lost = 85,600 - 80,800

Cash flow lost = 4,800