Reported $9,000 of sales, $6,000 of operating costs other than depreciation, and $1,500 of depreciation. The firm had no amortization charges, it had issued $4,000 of bonds that carry a 7% interest rate, and its federal-plus-state income tax rate was 40%. 2006 data are expected to remain unchanged except for one item, depreciation, which is expected to increase by $1,000. By how much will the depreciation change cause the firm's net income and net cash flow to change?
Note that the company uses the same depreciation for tax and stockholder reporting.
· Net income = $600,000.
· Tax rate = 40%.
· Interest expense = $200,000.
· Total investor-supplied operating capital employed = $9 million.
· After-tax cost of capital = 10%.
What is the company's EVA?
The solution provides the depreciation change of net income and cash flow..