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Financial Calculations

The Menendez Corporation expects to have sales of $12 million. Costs other than depreciation are expected to be 75 percent of sales, and depreciation is expected to be $1.5 million. All sales revenues will be collected in cash, and costs other than depreciation must be paid for during the year. Menendez's federal-plus-state tax rate is 40 percent.

a. PLEASE set up an income statement. What is Menendez's expected net cash flow?

Answer: $2,400,000.
[Please show the computing steps by which the answer to this problem was derived].

b. Suppose Congress changed the tax laws so that Menendez's depreciation expenses doubled. No changes in operations occurred. What would happen to reported profit and to net cash flow?

Answer: NI = 0; NCF = $3,000,000.
[Please show the computing steps by which the answer to this problem was derived].

c. Now suppose that Congress, instead of doubling Menendez's depreciation, reduced it by 50 percent. How would profit and net cash flow be affected?
Answer: NI = $1,350,000; NCF = $2,100,000.
[Please show the computing steps by which the answer to this problem was derived].

d. If this were your company, would you prefer Congress to cause your depreciation expense to be doubled or halved? Why? [Briefly explain].

Solution Summary

Financial Calculations are shown.

$2.19