Hi, i was having some difficulty with this question in particular. I attempted i

Question

Hi, i was having some difficulty with this question in particular. I attempted it to the best of my ability, however am unsure if my calculations and understanding of the concepts are correct. I would greatly appreicate any help! Thank you very much!

Nokela Industries purchases a $41.6 million cyclo-converter. The cyclo-converter will be depreciated by $10.4 milion per year over four years, starting this year. Suppose Nokela's tax rate is 40% a. What impact will the cost of the purchase have on earnings for each of the next four years? b. What impact will the cost of the purchase have on the firm's cash flow for the next four years? a. What impact will the cost of the purchase have on earnings for each of the next four years? ag decrease by $6.2 million each year for four years. (Select from the drop-down menu and round to one decimal place.) b. What impact will the cost of the purchase have on the firm's cash flow for the next four years? The impact on the firm's cash flow in year 1 is $ -37.4 million. (Round to one decimal place.) The impact on the firm's cash flow in years two through four is $42 million. (Round to one decimal place.)

Explanation / Answer

a) Decrease in earnings = Depreciation * ( 1 - tax rate) = $10.4 * (1 - 0.4) = $6.24m

b) Cash flow decreases (Year 1) = Purchase cost - (tax on depreciation) = 41.6 - (10.4 * 40%) = -37.44m

Cash flow increases (Year 2 to 4) = tax on depreciation = 10.4 * 40% = 4.16m

53.76

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