Sports Biz, a profitable company, built and equipped a $2,000,000 plant brought into operation early in Year 1. Earnings of the company (before depreciation on the new plant and before income taxes) are projected at: $1,500,000 in Year 1; $2,000,000 in Year 2; $2,500,000 in Year 3; $3,000,000 in Year 4; and $3,500,000 in Year 5. The company can use straight-line, double-declining-balance, or sum-of-the-years’-digits depreciation for the new plant. Assume the plant’s useful life is 10 years (with no salvage value) and an income tax rate of 50%.
Compute the separate effect that each of these three methods of depreciation would have on:
b. Income taxes
c. Net income
d. Cash flow (assumed equal to net income before depreciation)