Income and Cash Flow Analysis. The Berndt Corporation expects to have sales of $12 million. Costs other than depreciation are expected to be 75% 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. The federal tax rate is 21% (ignore any possible state corporate taxes). Berndt has no debt. Set up an income statement. What is Berndt’s expected net income? Its expected net cash flow? Suppose Congress changed the tax laws to double Berndt’s depreciation expenses. No changes in operations occurred. What would happen to reported profit and net cash flow? Now, suppose that Congress changed the tax laws such that, instead of doubling Berndt’s depreciation, it was reduced by 50%. How would profit and net cash flow be affected? If this were your company, would you prefer Congress to cause your depreciation expense to be doubled or halved? Why?

Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
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Income and Cash Flow Analysis. The Berndt Corporation expects to have sales of $12 million. Costs other than depreciation are expected to be 75% 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. The federal tax rate is 21% (ignore any possible state corporate taxes). Berndt has no debt.

  1. Set up an income statement. What is Berndt’s expected net income? Its expected net cash flow?
  2. Suppose Congress changed the tax laws to double Berndt’s depreciation expenses. No changes in operations occurred. What would happen to reported profit and net cash flow?
  3. Now, suppose that Congress changed the tax laws such that, instead of doubling Berndt’s depreciation, it was reduced by 50%. How would profit and net cash flow be affected?
  4. If this were your company, would you prefer Congress to cause your depreciation expense to be doubled or halved? Why?
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