Question

Darling Paper Container, Inc. purchased several machines at a total cost of $300,000. The installation cost for this equipment was $25,000. The firm plans to depreciate the equipment using the MACRS 5-year normal recovery period. The depreciation percentage according to the MACRS schedule is 20%. The company's marginal tax rate is a flat 21%. If the company reduces its reported income by the amount of the depreciation expense, what tax savings will result? O $60,000 O $12.600 $65,000 O $13,650 Question 23 4 pts During 2019, Amazing Corporation (AC) had EBIT of $150,000, a change in net fixed assets of $400,000, an increase in ne current assets of $100,000, an increase in spontaneous current liabilities of $400,000, a depreciation expense of $60,000, and a tax rate of 30%. Based on this information, AC's free cash flow is $5,000 .-55,000 $165.000 $65,000

Answer 1

1. Depriciation on the equient purchased for the year will be 20% on the amount of equipment i.e., 20% of 300,000 = $60,000

If adjusment has made in the reported income by reducing the depriciation amount then this amount will be deducted from the income so tax on this $60,000 will be the saving that the comapny is going to earn which will be 21% of $60,000 = $12,600

2. Free Cash Flow = Net Income + Non Cash Expenses - Increase in Working Capital - Capital Expenditure

Net Income = EBIT - Interest - Tax

Net Income = 150,000 - 30% of 150,000

= $105,000

Non Cash Expenses = $60,000

Increase in working Capital is not given so it will assume 0

Capital Expenditure is also not given so it will be also 0

FCF = 105,000 + 60,000

= $165,000