Assume a corporation has earnings before depreciation and taxes of $116,000 depr

ID: 2697776 • Letter: A

Question

Assume a corporation has earnings before depreciation and taxes of $116,000 depreciation of $44,000 and is in a 30 percent tax bracket.

How much would cash flow be if there were only $13,000 in depreciation? All other factors are the same.

How much cash flow is lost due to the reduced depreciation between $44,000 and $13,000?

Assume a corporation has earnings before depreciation and taxes of $116,000 depreciation of $44,000 and is in a 30 percent tax bracket.

(a)

How much would cash flow be if there were only $13,000 in depreciation? All other factors are the same.

(b)

How much cash flow is lost due to the reduced depreciation between $44,000 and $13,000?

In the current case tax paid is ( 116000 - 44000 )*0.3 = 21600

Cash flow is 116,000 - 21,600 = 94,400

If depreciation is 13000

a) Cash flow is 116000 - ( 116000 - 13000 )*0.3 = 85100

b) Hence the lost cash flow is 94400 - 85100 = $9,300

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