Nokela Industries purchases a $43.2 million cyclo-converter. The cyclo-converter

Question

Nokela Industries purchases a $43.2 million cyclo-converter. The cyclo-converter will bedepreciated by $10.8 million per year over four years, starting thisyear. Suppose Nekelas tax rate is 40%.

a. What impact will the cost of the purchase have on earnings foreach of the four years? (increase or decrease and by how much) b. What impact will the cost of the purchase have on thefirms cash flow in year 1?(_____ million)

Year 2 of the four? (______ million)

Please show how you came up with the answers.

Explanation / Answer

cost of equipment = 43.2 million

depreciation = 10.8 million

tax rate = 40%

1- earnings would be depreciated by the amount of depreciation = 10.8 million

2- effect on earning = 10.8*40% = 4.32 million tax would be saved.

3-effect on earning = 10.8*40% = 4.32 million tax would be saved.

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