Question

Assume a firm has earnings before depreciation and taxes of $630,000 and depreciation of $330,000. a. If it is in a 40 percent tax bracket, compute its cash flow.

Answer 1

Answer: $510,000

Explanation:

Given that,

Earnings before depreciation and taxes = $630,000

Depreciation = $330,000

Tax bracket = 40%

Earnings before taxes = Earnings before depreciation and taxes - Depreciation

                                     = $630,000 - $330,000

                                     = $300,000

Therefore, taxes = 40% of $300,000

                            = $120,000

Earnings after taxes = Earnings before taxes -  taxes

                                  = $300,000 - $120,000

                                  = $180,000

Cash flow = Earnings after taxes + Depreciation

                 = $180,000 +  $330,000

                 = $510,000