Prefer that congress increase or decrease the depreciation?
Not what you're looking for?
Montejo Corporation expects sales to be $ 12 million, operating costs other than depreciation are expected to be 75 percent of sales, and depreciation to be $ 1.5 million during the next year. All sales revenues will be collected in cash, and costs other than depreciation must be paid during the year. Montejo's interest expense is expected to be $ 1 million, and it is taxed at a 40 percent rate.
a) Set up an income statement and a cash flow statement for Montejo. What is the expected cash flow from operations?
b) Suppose congress changed the tax laws so that Montejo's depreciation expenses doubled, but no other changes occurred. What would happen to the net income and cash flow from operations expected during the year?
c) Suppose that congress, rather than increasing Montejo's depreciation, reduced it by 50 percent. How would the income and cash flows be affected?
d) If this company belonged to you, would you prefer that congress increase or decrease the depreciation expense allowed your company? Explain why.
Purchase this Solution
Solution Summary
Your tutorial creates three income statements and three operating cash flow statements and discusses which of the three scenarios I would want and why.
Solution Preview
See Excel for better formatting and to see inside cells for computations:
Income Statement:
Sales $12,000,000
Operating costs, except depreciation $9,000,000
Depreciation expense $1,500,000
Operating income $1,500,000
Interest expenses $1,000,000
Income before taxes $500,000
Tax expense $200,000
Net Income $300,000 < -- (a)
Cash flow statement:
Operating flows:
Net Income $300,000
Add: depreciation expense $1,500,000
Operating cash flows $1,800,000 < -- ...
Education
- BSc, University of Virginia
- MSc, University of Virginia
- PhD, Georgia State University
Recent Feedback
- "hey just wanted to know if you used 0% for the risk free rate and if you didn't if you could adjust it please and thank you "
- "Thank, this is more clear to me now."
- "Awesome job! "
- "ty"
- "Great Analysis, thank you so much"
Purchase this Solution
Free BrainMass Quizzes
Organizational Leadership Quiz
This quiz prepares a person to do well when it comes to studying organizational leadership in their studies.
Managing the Older Worker
This quiz will let you know some of the basics of dealing with older workers. This is increasingly important for managers and human resource workers as many countries are facing an increase in older people in the workforce
IPOs
This Quiz is compiled of questions that pertain to IPOs (Initial Public Offerings)
Team Development Strategies
This quiz will assess your knowledge of team-building processes, learning styles, and leadership methods. Team development is essential to creating and maintaining high performing teams.
Employee Orientation
Test your knowledge of employee orientation with this fun and informative quiz. This quiz is meant for beginner and advanced students as well as professionals already working in the HR field.