Show all calculations please 10 points Butterfly Tractors ha

Show all calculations please

(10 points) Butterfly Tractors has $14 million in sales last year. Cost of goods sold was $8 million, depreciation expense was $2 million, and the firm\'s tax rate was 35 percent (a) (b) What was the firm\'s net income and net cash flow? What would happen to net income and cash flow if depreciation were increased by $1 million? How do you explain the differing impact of depreciation on income versus cash flow? 5.

Solution

Requirement (a)

Net Income = [Sales – Cost of goods sold – Depreciation] x [1- Tax Rate]

= [$14 Million - $8 Million - $2 Million] x [1-0.35]

= $4 Million x 0.65

= $2.60 Million

Net Cash Flow = Net Income + Depreciation

= $2.60 Million + $2 Million

= $4.60 Million

Requirement (b)

Net Income = [Sales – Cost of goods sold – Depreciation] x [1- Tax Rate]

= [$14 Million - $8 Million - $3 Million] x [1-0.35]

= $3 Million x 0.65

= $1.95 Million

Net Cash Flow = Net Income + Depreciation

= $1.95 Million + $3 Million

= $4.95 Million

Explanation

If the Depreciation Expense is increased by $1 Million during the year, then the net income will be decreased to the extent of 65% and the Net Cash Flow will increase to extent of the tax rate of 35% since the cash flow is the Net Income plus Depreciation for the year