Last year August Manufacturing reported $10 250 of sales $3 500 of operating costs other than

QUESTION

Last year, August Manufacturing reported $10,250 of sales, $3,500 of operating costs other than depreciation, and $1,250 of depreciation. The company had no amortization charges, it had $3,500 of bonds outstanding that carry a 6.5% interest rate, and its federal-plus-state income tax rate was 35%. This years data are expected to remain unchanged except for one item, depreciation, which is expected to increase by $725. By how much will the depreciation change cause the firms net after-tax income and its net cash flow to change? Note that the company uses the same depreciation calculations for tax and stockholder reporting purposes.
Answer : Interest = 0.065 x 3500 = 227.50 EBT (old) = Sales Op cost Depr(old) Interest = 10250 3500 1250 227.50 = 5272.50 Tax (old) = 0.35 x 5272.50 = 1845.38 NI (old) = EBT Tax = 5272.50 1845.38 = 3427.12 Net Cash Flow (old) = NI(old) + depr (old) = 3427.12 + 1250 = 4677.50 New Depr = 1250 + 725 = 1975 EBT (new) = 10250 3500 -1975 -227.50 = 4547.50 NI (new) = EBT (1 Tax Rate)

= 4547.50 (1 0.35) = 2955.88 NCF (new) = 2955.88 + 1975 = 4930.88 NI (old) NI (new) = 3427.12 2955.88 = $ 471.24 (Decrease) NCF (old) NCF (new) = 4677.50 4930.88 = ($ 253.38) Increase. Net Income has decreased with new depr but Net cash flow has incr

ANSWER:

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