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2. Butch's projects the following condensed income statements for the current year and next year: Current Year Earnings before Depreciation & Taxes $550,000 Depreciation 50,000
2. Butch's projects the following condensed income statements for the current year and next year: Current Year Earnings before Depreciation & Taxes $550,000 Depreciation 50,000 Next Year $600,000 50,000 Earnings Before Taxes Taxes (40%) $500,000 200,000 $550,000 220,000 Net Income $300,000 $330,000 ======== Cash Flow (net income + depreciation) ======== ======== a. Because depreciation is Butch's only non-cash expense, assume net cash flow can be estimated by adding depreciation to net income. Compute the projected cash flow for the Current Year and Next Year. b. Butch has the possibility to switch to accelerated depreciation. This would change the current year depreciation to $80,000 and next year's depreciation to $20,000. The total depreciation for the two years does not change ($100,000). What would be the new expected net income and cash flow for the current year and next year? BUTCHI c. As a financial consultant to Butch, do you recommend the current straight-line depreciation or the proposed accelerated depreciation? Remember, two principles of finance: cash flows re the source of value (not profits) and money has a time value. 2. Butch's projects the following condensed income statements for the current year and next year: Current Year Earnings before Depreciation & Taxes $550,000 Depreciation 50,000 Next Year $600,000 50,000 Earnings Before Taxes Taxes (40%) $500,000 200,000 $550,000 220,000 Net Income $300,000 $330,000 ======== Cash Flow (net income + depreciation) ======== ======== a. Because depreciation is Butch's only non-cash expense, assume net cash flow can be estimated by adding depreciation to net income. Compute the projected cash flow for the Current Year and Next Year. b. Butch has the possibility to switch to accelerated depreciation. This would change the current year depreciation to $80,000 and next year's depreciation to $20,000. The total depreciation for the two years does not change ($100,000). What would be the new expected net income and cash flow for the current year and next year? BUTCHI c. As a financial consultant to Butch, do you recommend the current straight-line depreciation or the proposed accelerated depreciation? Remember, two principles of finance: cash flows re the source of value (not profits) and money has a time value
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