Butterfly Tractors had 1800 million in sales last year Cost

Butterfly Tractors had $18.00 million in sales last year. Cost of goods sold was $8.80 million, depreciation expense was $2.80 million, interest payment on outstanding debt was $1.80million, and the firm’s tax rate was 35%.

a. What was the firm’s net income? (Enter your answers in millions rounded to 2 decimal places.)

b. What was the firm’s cash flow? (Enter your answers in millions rounded to 2 decimal places.)

c. What would happen to net income and cash flow if depreciation were increased by $1.80 million? (Enter your numeric answers in millions rounded to 2 decimal places. Select \"unaffected\" if the results do not affect the balance.)

f. What would be the impact on cash flow if depreciation was $1.80 million and interest expense was $2.80 million? (Enter your numeric answer in millions rounded to 2 decimal places. Select \"unaffected\" if the results do not affect the balance.)

Solution

a) Net Income = Pretax Income * (1 - Tax Rate)

Pretax Income = (Sales - COGS - Depreciation - Interest Expense)

Therefore, For our question,

Net Income = (18 mil- 8.80 mil - 2.80 mil - 1.80 mil) * (1 - 35%) = 4.6 * (1 - 35%) = $2.99 mil

b) Cash flow = Net Income + Depreciation

Cash flow = 2.99 mil + 2.80 mil = $5.79 mil

c) In this case, New depreciation = $2.8 mil + $1.8 mil = $4.6mil

Net Income = (18 mil- 8.80 mil - 4.60 mil - 1.80 mil) * (1 - 35%) = 2.8 * (1 - 35%) = $1.82 mil

Cashflow = 1.82 + 4.6 = 6.42 mil

d) Depreciation = 1.80mil, Interest Expense = $2.80 mil

Net Income = (18 mil- 8.80 mil - 1.80 mil - 2.80 mil) * (1 - 35%) = 4.6 * (1 - 35%) = $2.99 mil (UNAFFECTED)

Net Cash flow = 2.99 mil + 1.80 mil = $4.79 mil