Award: 18 out of 30.00 points Butterfly Tractors had $20.50 million in sales las
ID: 2417409 • Letter: A
Question
Award: 18 out of 30.00 points
Butterfly Tractors had $20.50 million in sales last year. Cost of goods sold was $9.30 million, depreciation expense was $3.30 million, interest payment on outstanding debt was $2.30 million, and the firm’s tax rate was 30%.
a.
What was the firm’s net income and net cash flow? (Enter your answers in millions rounded to 2 decimal places.)
Net income
$ 3.92 million
Net cash flow
$ 7.22 million
net income and net cash flow are the correct answer
b.
What would happen to net income and cash flow if depreciation were increased by $2.30 million? (Input all amounts as positive values. Enter your answers in millions rounded to 2 decimal places.)
Net income
decreased by
$ million
Cash flow
increased by
$ million
d.
What would be the impact on net income and cash flow if the firm’s interest expense were $2.30 million higher. (Input all amounts as positive values. Enter your answers in millions rounded to 2 decimal places.)
Net income
decreased by
$ million
Cash flow
decreased by
$ million
eBook & Resources
eBook: The Income Statement
Butterfly Tractors had $20.50 million in sales last year. Cost of goods sold was $9.30 million, depreciation expense was $3.30 million, interest payment on outstanding debt was $2.30 million, and the firm’s tax rate was 30%.
Explanation / Answer
The net income is the difference between Sales and all operating expenses and interest and tax expenses. The tax on net income is calculated on Net income after interest expense. The calculation of net income after tax is as under:
Net cash flows are the net income increased by the amount of depreciation. The tax on income is the cash outflow of the company therefore it will be included in calculation of net cash flows.
b.
If deprecation increases by $2.30 million then the net income will decreases by $1.61 that is depreciation after tax [$2.30(1-0.30)] calculated as under:
The depreciation will be added back to the net income for calculation of net cash flow therefore net cash flow will increase by $0.69 million [(Tax on increased depreciation i.e. $2.3 million(1-0.30)].
Net income Decreases by $1.61 million.
Net cash flow increased by $0.69 million.
c.
If interest expenses increases by $2.30 million then the net income will decreases by $1.61 that is increased interest after tax [$2.30(1-0.30)] calculated as under:
The net cash flow will also reduced by $1.61 million due to reduced net income.
Net income Decreases by $1.61 million.
Net cash flow increased by $1.61 million.
Net Income of Butterfly Tractors calcualted as under: Particulars Amount Sales $ 20.50 Less: Cost of goods sold $ (9.30) Depreciation expenses $ (3.30) Earning before interest and taxes(EBIT) $ 7.90 Less: Interest expenses $ (2.30) Earning after interest before taxes $ 5.60 Less: Tax on income ($5.60@30%) $ (1.68) Net Income $ 3.92 Net cash flow of Butterfly Tractors calculated as under: Particulars Amount Net income $ 3.92 Add: Depreciation $ 3.30 Net cash flows of the company $ 7.22Related Questions
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