Question

Consider the following income statement: Sales $ 875,904 Costs 569,856 Depreciation 129,600 Taxes 21 %

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

= $ 875,904 - $ 569,856 - $ 129,600

= $ 176,448

Net income is computed as follows:

= (Sales - costs - depreciation) x (1 - tax rate)

= ($ 875,904 - $ 569,856 - $ 129,600) x (1 - 0.21)

= $ 139,393.92

The OCF is computed as follows:

= (Sales - costs - depreciation) + depreciation - tax expenses

= ($ 875,904 - $ 569,856 - $ 129,600) + $ 129,600 - tax expenses

Tax expenses is computed as follows:

= (Sales - costs - depreciation) x tax rate

= ($ 875,904 - $ 569,856 - $ 129,600) x 21%

= $ 37,054.08

So, the OCF will be as follows:

= ($ 875,904 - $ 569,856 - $ 129,600) + $ 129,600 - $ 37,054.08

= $ 268,993.92

The depreciation tax shield is computed as follows:

= Depreciation x tax rate

= $ 129,600 x 0.21

= $ 27,216

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