Butterfly Tractors had $14 million in sales last year. Cost of goods sold was $8 million, depreciation expense was $2 million, interest payment on outstanding debt was $1 million, and the firm’s tax rate was 35 percent.
a. What was the firm’s net income and net cash flow?
b. What would happen to net income and cash flow if depreciation were increased by $1 million? How do you explain the differing impact of depreciation on income versus cash flow?