Nokela Industries purchases a $43.2 million cyclo-converter. The cyclo-converter

Question

Nokela Industries purchases a $43.2 million cyclo-converter. The cyclo-converter will bedepreciated by $10.8 million per year over four years, starting thisyear. Suppose Nekelas tax rate is 40%.

a. What impact will the cost of the purchase have on earnings foreach of the four years? (increase or decrease and by how much)

b. What impact will the cost of the purchase have on thefirms cash flow in year 1?(_____ million)

Year 2 of the four? (______ million)

Please show how you came up with the answers.

Explanation / Answer

a) Earnings will decrease by amount of depreciation net of tax 10.8 (1-.40) = 6.48 million each year

b) Cash flow will increase by amount of tax savings on depreciation = 10.8*.40 = 4.32 milllion

Year 2 = 4.32 million

Related Questions

Navigate

• Browse (All)
• Browse N
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.