Butterfly Tractors had $18.00 million in sales last year. Cost of goods sold was
ID: 2824093 • Letter: B
Question
Butterfly Tractors had $18.00 million in sales last year. Cost of goods sold was $8.80 million, depreciation expense was $2.80 million, interest payment on outstanding debt was $1.80million, and the firm’s tax rate was 35%.
a. What was the firm’s net income? (Enter your answers in millions rounded to 2 decimal places.)
b. What was the firm’s cash flow? (Enter your answers in millions rounded to 2 decimal places.)
c. What would happen to net income and cash flow if depreciation were increased by $1.80 million? (Enter your numeric answers in millions rounded to 2 decimal places. Select "unaffected" if the results do not affect the balance.)
f. What would be the impact on cash flow if depreciation was $1.80 million and interest expense was $2.80 million? (Enter your numeric answer in millions rounded to 2 decimal places. Select "unaffected" if the results do not affect the balance.)
Explanation / Answer
a) Net Income = Pretax Income * (1 - Tax Rate)
Pretax Income = (Sales - COGS - Depreciation - Interest Expense)
Therefore, For our question,
Net Income = (18 mil- 8.80 mil - 2.80 mil - 1.80 mil) * (1 - 35%) = 4.6 * (1 - 35%) = $2.99 mil
b) Cash flow = Net Income + Depreciation
Cash flow = 2.99 mil + 2.80 mil = $5.79 mil
c) In this case, New depreciation = $2.8 mil + $1.8 mil = $4.6mil
Net Income = (18 mil- 8.80 mil - 4.60 mil - 1.80 mil) * (1 - 35%) = 2.8 * (1 - 35%) = $1.82 mil
Cashflow = 1.82 + 4.6 = 6.42 mil
d) Depreciation = 1.80mil, Interest Expense = $2.80 mil
Net Income = (18 mil- 8.80 mil - 1.80 mil - 2.80 mil) * (1 - 35%) = 4.6 * (1 - 35%) = $2.99 mil (UNAFFECTED)
Net Cash flow = 2.99 mil + 1.80 mil = $4.79 mil
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.