Income and Cash Flow Analysis. 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 revenues will be collected in cash, and costs other than depreciation must be paid for during the year. The federal tax rate is 21% (ignore any possible state corporate taxes). Berndt has no debt.Set up an income statement. What is Berndt’s expected net income? Its expected net cash flow?Suppose Congress changed the tax laws to double Berndt’s depreciation expenses. No changes in operations occurred. What would happen to reported profit and net cash flow?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?If this were your company, would you prefer Congress to cause your depreciation expense to be doubled or halved? Why?

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Intermediate Financial Management (MindTap Course List)

13th Edition

ISBN:9781337395083

Author:Eugene F. Brigham, Phillip R. Daves

Publisher:Eugene F. Brigham, Phillip R. Daves

Chapter6: Accounting For Financial Management

Section: Chapter Questions

Problem 11P: The Berndt Corporation expects to have sales of 12 million. Costs other than depreciation are...

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Income and Cash Flow Analysis. 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 revenues will be collected in cash, and costs other than depreciation must be paid for during the year. The federal tax rate is 21% (ignore any possible state corporate taxes). Berndt has no debt.

Set up an income statement. What is Berndt’s expected net income? Its expected net cash flow?
Suppose Congress changed the tax laws to double Berndt’s depreciation expenses. No changes in operations occurred. What would happen to reported profit and net cash flow?
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?
If this were your company, would you prefer Congress to cause your depreciation expense to be doubled or halved? Why?

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