Question

Problem 2. Consider the following income statement:

Sales $492,696

Costs $320,544

Depreciation $72,900

Taxes 24%

Calculate the EBIT

Calculate the net income.

Calculate the OCF.

What is the depreciation tax shield?

Answer 1

EBIT is computed as shown below:

= Sales - Costs - Depreciation

= $ 492,696 - $ 320,544 - $ 72,900

= $ 99,252

Net income is computed as follows:

= EBIT - tax rate of 24%

= $ 99,252 - 24% i.e. $ 23,820.48

= $ 75,431.52

OCF is computed as follows:

= EBIT + Depreciation - taxes

= $ 99,252 + $ 72,900 - $ 23,280.48

= $ 148,871.52

The depreciation tax shield is computed as follows:

= Depreciation x tax rate

= $ 72,900 x 24%

= $ 17,496

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