Problem:
The Berndt Corporation expects to have sales of $12 million. Costs other than depreciation are expected to be 75% of sales, and depreciation is expected to be $1.5 million. All sales revenue will be collected in cash, and costs other than depreciation must be paid for during the year. Berndt's federal-plus-state tax rate is 40%. Berndt has no debt.
Required:
Question 1: Set up an income statement. What is Berndt's expected net cash flow?
Question 2: Suppose congress changed the tax laws so that Berndt's depreciation expenses doubled. No changes in operational occurred. What would happen to reported profit and to net cash flow?
Question 3: Now suppose that congress changed the tax laws such that, instead of doubling Berndt's depreciation, it was reduced by 50%. How would profit and net cash flow be affected?
Question 4: If this were your company, would you prefer Congress to cause your depreciation expense to be doubled or halved? Why?
Note: Show all workings.