Assume a firm has earnings before depreciation and taxes of $580,000 and no depreciation. It is...
Assume a firm has earnings before depreciation and taxes of $580,000 and no depreciation. It is in a 35 percent tax bracket.
a. Compute its cash flow.
b. Assume it has $580,000 in depreciation. Recompute its cash flow.
c. How large a cash flow benefit did the depreciation provide?
Homework Answers
| Case A | Case B | |
| Earnings before depreciation and taxes | 580,000 | 580,000 |
| Less:depreciation | - | 580,000 |
| Earnings before taxes | 580,000 | 0 |
| Less:taxes | (580,000*35%)=203,000 | 0 |
| Net income | 377,000 | 0 |
| Add:depreciation | - | 580,000 |
| Cash flow | 377,000 | 580,000 |
Hence cash flow benefit due to depreciation=Depreciation*Tax rate
=580,000*35%=$203000
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