Assume a corporation has earnings before depreciation and taxes of $120,000, depreciation of $48,000, and that...

Question

Question

Assume a corporation has earnings before depreciation and taxes of $120,000, depreciation of $48,000, and that it has a 35 percent tax bracket.

a. Compute its cash flow using the following format. (Input all answers as positive values.)

Earnings before depreciation and taxes

Depreciation

Earnings before taxes

Taxes

Earnings after taxes

Depreciation

Cash Flow

b. How much would cash flow be if there were only $12,000 in depreciation? All other factors are the same.

c. How much cash flow is lost due to the reduced depreciation from $48,000 to $12,000?

Answer 1

Answer #1

	Case a	Case b
Earnings before depreciation and taxes	120000	120000
Depreciation	48000	12000
Earnings before taxes	72000	108000
Taxes	(72000*35%)=25200	(108000*35%)=37800
Earnings after taxes	46800	70200
Depreciation	48000	12000
Cash flow	94800	82200

Hence cash flow lost=(94800-82200)=$12600.

Answer 2

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