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# fm3 7 - ∆ Depreciation = 0.4(\$1,500,000 = \$600,000 c If...

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Answers and Solutions: 3- 7 3-11 a. Income Statement Sales revenues \$12,000,000 Costs except depreciation 9,000,000 Depreciation 1,500,000 EBT \$ 1,500,000 Taxes (40%) 600,000 Net income \$ 900,000 Add back depreciation 1,500,000 Net cash flow \$ 2,400,000 b. If depreciation doubled, taxable income would fall to zero and taxes would be zero. Thus, net income would decrease to zero, but net cash flow would rise to \$3,000,000. Menendez would save \$600,000 in taxes, thus increasing its cash flow: CF = T(
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Unformatted text preview: ∆ Depreciation) = 0.4(\$1,500,000) = \$600,000. c. If depreciation were halved, taxable income would rise to \$2,250,000 and taxes to \$900,000. Therefore, net income would rise to \$1,350,000, but net cash flow would fall to \$2,100,000. d. You should prefer to have higher depreciation charges and higher cash flows. Net cash flows are the funds that are available to the owners to withdraw from the firm and, therefore, cash flows should be more important to them than net income....
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