Question

The Berndt Corporation expects to have sales of $13 million. Costs other than depreciation are expected to be 70% of sales, and depreciation is expected to be $1.95 million. All sales revenues will be collected in cash, and costs other than depreciation must be paid for during the year. Berndt's federal-plus-state tax rate is 35%. Berndt has no debt. a. Set up an income statement. What is Berndt's expected net income? Enter your answer in dollars. For example, an answer of $1.2 million should be entered as 1,200,000. Round your answer to the nearest dollar. What is Berndt's expected net cash flow? Enter your answer in dollars. For example, an answer of $1.2 million should be entered as 1,200,000. Round your answer to the nearest dollar. b. Suppose Congress changed the tax laws so that Berndt's depreciation expenses doubled. No changes in operations occurred. What would happen to reported profit and to net cash flow? I. If depreciation doubled, taxable income would fall to zero, taxes would be zero, and net cash flow would decline. II. If depreciation doubled, taxable income would not be affected since depreciation and amortization are non-cash expenses. Net cash flow would also be unaffected. III. If depreciation doubled, taxable income would not be affected since depreciation and amortization are non-cash expenses. Net cash flow would double. IV. If depreciation doubled, taxable income would fall to zero, taxes would be zero, and net cash flow would be unaffected. V. If depreciation doubled, taxable income would fall to zero, taxes would be zero, and net cash flow would rise. -Select-

Answer 1

Answer a. Income Statement Sales Less: Cost other than depreciation (70%* $13,000,000) Less: Depreciation EBT Less: Taxes (35%) Net income Add: Depreciation Net cash flow $ 13,000,000 $ 9,100,000 $ 1,950,000 $ 1,950,000 $ 682,500 $ 1,267,500 $ 1,950,000 $ 3,217,500 Answer b. If depreciation doubled, taxable income would fall to zero, taxes would be zero, and net cash flow would rise.