The MacCauley Company has sales of $200 million and totalexpenses (excluding dep

Question

The MacCauley Company has sales of $200 million and totalexpenses (excluding depreciation) of $130 million. Straight-line depreciation on the company's assets is $15 million,and the maximum accelerated depreciation allowed by law is $25million. Assume that all taxalbe income is taxed at 40percent. Assume also that net working capital remainsconstant. a) Calculate the MacCuley Company's after-tax operating cashflow using both straightline and accelerated depreciation. b) Assuming that the company uses straight-line depreciationfor book purposes and accelerated depreciation for tax purposes,show the income statement reported to the stockholders. Whatis the after-tax operating cash flow under thesecircumstances? The MacCauley Company has sales of $200 million and totalexpenses (excluding depreciation) of $130 million. Straight-line depreciation on the company's assets is $15 million,and the maximum accelerated depreciation allowed by law is $25million. Assume that all taxalbe income is taxed at 40percent. Assume also that net working capital remainsconstant. a) Calculate the MacCuley Company's after-tax operating cashflow using both straightline and accelerated depreciation. b) Assuming that the company uses straight-line depreciationfor book purposes and accelerated depreciation for tax purposes,show the income statement reported to the stockholders. Whatis the after-tax operating cash flow under thesecircumstances?

Explanation / Answer

Income Statement

Income Statement

Calculating After tax cashflowsusing Straightline depreciation:

Income Statement

Sales $200,000,000 Less: Total expenses(excluding depreciation) $130,000,000 Earnings before Interst andDepreciation $70,000,000 Less: Depreciation $15,000,000 EarningsBefore Tax (EBT) $55,000,000 Less: Tax (40%) $22,000,000 After-tax Operating Cash flow $33,000,000 Calculating After tax cashflowsusing maximum accelerated depreciation:

Income Statement

Sales $200,000,000 Less: Total expenses(excluding depreciation) $130,000,000 Earnings before Interst andDepreciation $70,000,000 Less: Depreciation $25,000,000 EarningsBefore Tax (EBT) $45,000,000 Less: Tax (40%) $18,000,000 After-tax Operating Cash flow $27,000,000

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