Question

Consider the following income statement:

Sales $ 1,094,880

Costs 712,320

Depreciation 162,000

Taxes 24 %

1) Calculate the EBIT.

2) Calculate the net income.

3) Calculate the OCF.

4) What is the depreciation tax shield?

Answer 1

Solution:

Statement showing the calculation of the EBIT, Net Income and Operating cash flow
Sl.No.	Particulars	Amount
1	Sales	$                     1,094,880.00
2	Less : Costs	$                       -712,320.00
3	Less : Depreciation	$                       -162,000.00
4	Earnings before Interest and Tax (EBIT)	$                        220,560.00
5	Less : Interest	$                                         -
6	Earnings before tax	$                        220,560.00
7	Less : Tax @ 24 % = (6) * 0.24	$                         -52,934.40
8	Net Income	$                        167,625.60
9	Add back : Depreciation	$                        162,000.00
10	Operating cash flow	$                        329,625.60

1) The EBIT = $ 220,560.00

2) The Net Income = $ 167,625.60

3) The Operating Cash flow = $ 329,625.60

4)The formula for calculation of Depreciation Tax Shield is as follows

= Depreciation * Tax Rate

As per the Information given in the question we have

Depreciation = $ 162,000 ; Tax rate = 24 % = 0.24

Thus, the value of the depreciation tax shield = Depreciation * Tax Rate

= $ 162,000 * 24 %

= $ 38,880

The Depreciation tax shield = $ 38,880