Question

Assume a firm has earnings before depreciation and taxes of \(440,000 and depreciation of \)140,000.

a. If it is in a 35 percent tax bracket, compute its cash flow.

b. If it is in a 20 percent tax bracket, compute its cash flow.

Short answer

Answer

1. Cash flow when the tax rate is 35%:$335,000.

2. Cash flow when the tax rate is 40%: $380,000.

Step-by-step solution

Definition of Income Tax

The expense incurred against the taxable income earned by the business entity is known as income tax. It is a fee the government charges over the income earned more than the prescribed limit.

Calculation of cash flow when tax bracket is 35%

Particular	Amount $
Earnings before depreciation and taxes	$440,000
Less: Depreciation	(140,000)
Earnings before tax	300,000
Less: tax @35%	(105,000)
Earnings after tax	195,000
Add: Depreciation	140,000
Cash flow	$335,000

Calculation of cash flow when tax bracket is 20%

Particular	Amount $
Earnings before depreciation and taxes	$440,000
Less: Depreciation	(140,000)
Earnings before tax	300,000
Less: tax @20%	(60,000)
Earnings after tax	240,000
Add: Depreciation	140,000
Cash flow	$380,000