Nokela Industries purchases a $43.6 million cyclo-converter. The cyclo-converter

Question

Nokela Industries purchases a $43.6 million cyclo-converter. The cyclo-converter will be depreciated by $10.9 million per year over four years, starting this year. Suppose Nokela's tax rate is 40% a. What impact will the cost of the purchase have on earnings for each of the next four years? b. What impact will the cost of the purchase have on the firm's cash flow for the next four years? a. What impact will the cost of the purchase have on earnings for each of the next four years? Earnings will by Smillion each year for four years. (Select from the drop-down menu and round to one decimal place.)

Explanation / Answer

(a) Earning for the next four year would have to deduct the depreciation expenses. After taxes, this would lead to decline of (10.9million*40%) 6.54 million each years for the next four (earning would decrease by 10.9 million,without taxes. However these lower earnings due to D&A result in less taxes of 10.9 million *40% =4.36 million i.e net income only decrease by 10.9 mn-4.36 mn=6.54 mn

(b) cash flow for the next four years:less 39.24 million (43.6mn-4.36mn,alternatively,you pay 43.6 Million for the cyclo- convertor but pay 4.36 million less in taxes) this year, and add 4.36 million (-6.54+10.9 i.e tax saving) for the three following years.

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