ABC purchased a $20,000,000 machine. The machine will be depreciated by $4,000,000 per year over 5...
ABC purchased a $20,000,000 machine. The machine will be depreciated by $4,000,000 per year over 5 years, starting this year. Suppose ABC is paying 30% tax rate. Assuming no other changes, which of the following will be CORRECT?
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ABC’s earnings for the year will be lower by $20 million, and its cash flow for the year will be higher by $4 million.
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ABC’s earnings for the year will be lower by $4 million and its cash flow for the year will be higher by $4 million.
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ABC’s earnings for the year will be lower by $2.8 million, and its cash flow for the year will be higher by $2.8 million.
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ABC’s earnings for the year will be lower by $2.8 million, and its cash flow for the year will be higher by $1.2 million.
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ABC’s earnings for the year will be lower by $2.8 million, and its cash flow for the year will be lower by $1.2 million.
Homework Answers
Correct answer is option D.ABC’s earnings for the year will be lower by $2.8 million, and its cash flow for the year will be higher by $1.2 million.
ABC 's earnings will be lower by the amount of depreciation for the year after considering tax benefits , ie
= 4 million - 30% tax = $2.8 million
ABC 's cash flow will be higher by the amount of tax benefits from the depreciation ie,
=4 million * 30 % = 1.2 million
NOTE:- Total cost of assets does not have effect on earnings and cash flows
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