Question

Nokela Industries purchases a $40.4 million cyclo-converter. The cyclo-converter will be depreciated by $10.1 million per year over four years, starting this year. Suppose Nokela's tax rate is 25% a. What impact will the cost of the purchase have on earnings for each of the next four years? b. What impact will the cost of the purchase have on the firm's cash flow for the next four years? a. What impact will the cost of the purchase have on earnings for each of the next four years? Earnings will by million each year for four years. (Select from the drop-down menu and round to decimal place.) b. What impact wil the cost of the purchase have on the firm's cash flow for the next four years? The impact on the firm's cash flow in year 1 is million (Round to one decimal place.) The impact on the firm's cash flow in years two through four is 5 milion (Round to one decimal place)

Answer 1

Part A

Earnings will decline by $7.6 million each year for four years

Earnings for the next four years would have to deduct the depreciation expense. After taxes, this would lead to a decline of 10.1 × (1 – 25%) = $7.6 million each year for the next four years.

Part B

The impact on the firm’s cash flow in years 1 is $(37.9) million (-7.6+10.1-40.4)

The impact of the firms’s cash flow in years two through four is $2.5 million (10.1-7.6)

Cash flow for the next four years: less $37.9 million (-7.6+10.1-40.4) this year, and add $2.5 million
(10.1-7.6) for the three following years