question archive The Berndt Corporation expects to have sales of $12 million
The Berndt Corporation expects to have sales of $12 million
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The Berndt Corporation expects to have sales of $12 million. Costs other than depreciation are expected to be 80% of sales, and depreciation is expected to be $1.2 million. All sales revenues will be collected in cash, and costs other than depreciation must be paid for during the year. Brendt's federal-plus-state tax rate is 40%. Berndt has no debt. The data has been collected in the Microsoft Excel Online file below. Open the spreadsheet and perform the required analysis to answer the questions below. Open spreadsheet a. Set up an income statement. What is Berndt's expected net cash flow? Enter your answer in dollars. For example, an answer of $1.2 million should be entered as 1,200,000. Round your answer to the nearest dollar. $ b. Suppose Congress changed the tax laws so that Berndt's depreciation expenses doubled. No changes in operations occurred. What is Berndt's expected net cash flow? Round your answer to the nearest dollar. $ C. Now suppose that Congress changed the tax laws such that, instead of doubling Berndt's depreciation, it was reduced by 50%. What is Berndt's expected net cash flow? Round your answer to the nearest dollar. $ d. If this were your company, would you prefer Congress to cause your depreciation expense to be doubled or halved? B ? D 4 5 6 A Costs other than depreciation as % of sales Depreciation Federal plus state tax rate Interest 80.00% $1,200,000 40.00% $0 7 8 Formulas $12,000,000 #N/A 1,200,000 #N/A 0 $0 #N/A #N/A #N/A 1,200,000 #N/A 9 Income Statement: 10 Sales 11 Costs except depreciation 12 Depreciation 13 Earnings before interest and taxes (EBIT) 14 Interest 15 Pre-tax earnings 16 Taxes 17 Net income 18 19 Net Cash Flow: 20 Net income 21 Depreciation 22 Net cash flow 23 24 Original Depreciation Doubled 25 26 Income Statement: 27 Sales 28 Costs except depreciation 29 Depreciation 30 Earnings before interest and taxes (EBIT) 31 Interest 32 Pre-tax earnings 33 Taxes 34 Net income 35 36 Net Cash Flow: 37 Net income $2,400,000 $12,000,000 #N/A 2,400,000 #N/A 0 $0 #N/A #N/A #N/A
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Below are the formulas used for the above calcualations:
Costs other than Depreciation = Sales * Costs other than Depreciation as a % of Sales
EBIT = Sales - Costs other than Depreciation - Depreciation
Pre Tax Earnings = EBIT - Interest
Taxes = Pre - Tax Earnings * Tax Rate
Net Income = Pre Tax Earnings - Taxes
Net Cash Flows = Net Income + Depreciation.
a)
Original Case:
Sales = $12,000,000
Costs other than Depreciation = 80% of Sales
Depreciation = $1,200,000
Interest = $0
Tax Rate = 40%
Income Statement:
Sales $12,000,000
Costs other than Depreciation $9,600,000 (80% * 12,000,000)
Depreciation $1,200,000
Earnings before interest & tax (EBIT) $1,200,000 (12,000,000 - 9,600,000 - 1,200,000)
Interest $0
Pre Tax Earnings $1,200,000
Taxes $480,000 (1,200,000 * 40%)
Net Income $720,000
Net Cash Flow:
Net Income $720,000
Depreciation $1,200,000
Net Cash Flow $1,920,000 (720,000 + 1,200,000)
Thus, Net Cash Flows in the Original Case would be $1,920,000.
b)
Double Depreciation Case:
Sales = $12,000,000
Costs other than Depreciation = 80% of Sales
Depreciation = $2,400,000 (1,200,000 * 2)
Interest = $0
Tax Rate = 40%
Income Statement:
Sales $12,000,000
Costs other than Depreciation $9,600,000 (80% * 12,000,000)
Depreciation $2,400,000
Earnings before interest & tax (EBIT) $0 (12,000,000 - 9,600,000 - 2,400,000)
Interest $0
Pre Tax Earnings $0
Taxes $0 (0 * 40%)
Net Income $0
Net Cash Flow:
Net Income $0
Depreciation $2,400,000
Net Cash Flow $2,400,000 (0 + 2,400,000)
Thus, Net Cash Flows in the Original Case would be $2,400,000.
c)
Half Depreciation Case:
Sales = $12,000,000
Costs other than Depreciation = 80% of Sales
Depreciation = $600,000 (1,200,000 / 2)
Interest = $0
Tax Rate = 40%
Income Statement:
Sales $12,000,000
Costs other than Depreciation $9,600,000 (80% * 12,000,000)
Depreciation $600,000
Earnings before interest & tax (EBIT) $1,800,000 (12,000,000 - 9,600,000 - 600,000)
Interest $0
Pre Tax Earnings $1,800,000
Taxes $720,000 (1,800,000 * 40%)
Net Income $1,080,000
Net Cash Flow:
Net Income $1,080,000
Depreciation $600,000
Net Cash Flow $1,680,000 (1,080,000 + 600,000)
Thus, Net Cash Flows in the Original Case would be $1,680,000.
d)
Since the Net Cash Flows is highest in case of the double depreciation ($2,400,000), firm should prefer the Congress to double the depreciation.
