Problem1. The Berndt Corporation anticipates having sales of $12 million. Costs other than depreciation are anticipated to be 75% of sales, and depreciation is anticipated to be $1.5 million. All sales revenue will be gathered in cash, and costs other than depreciation should be paid for during the year. Berndt's federal-plus-state tax rate is 40%. Berndt has no debt.
Question1. Set up the income statement. What is Berndt's expected net cash flow?
Question2. Assume congress changed the tax laws so that Berndt's depreciation expenditures doubled. No changes in operational happened. What would take place to reported profit and to net cash flow?
Question4. Now assume that congress changed the tax laws such that, instead of doubling Berndt's depreciation, it was decreased by 50%. How would profit and net cash flow be affected?
Question5. If this were your company, would you prefer Congress to cause your depreciation expenditure to be doubled or halved? Why?