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Problem 12-3 Cash flow [LO2] Assume a firm has earnings before depreciation and taxes of $200,000 and no depreciation. It is in a 40 percent
| Problem 12-3 Cash flow [LO2] Assume a firm has earnings before depreciation and taxes of $200,000 and no depreciation. It is in a 40 percent tax bracket. a. Compute its cash flow. b. Assume it has $200,000 in depreciation. Recompute its cash flow. c. How large a cash flow benefit did the depreciation provide? | ||||||
| Input variables: | ||||||
| Earnings before depreciation and taxes | $200,000 | |||||
| Depreciation | $0 | |||||
| Tax rate | 40 | percent | ||||
| b. Depreciation | $200,000 | |||||
| Solution and Explanation: | ||||||
| a. | ||||||
| Earnings before depreciation and taxes | ||||||
| Depreciation | ||||||
| Earnings before taxes | ||||||
| Taxes | ||||||
| Earnings after taxes | ||||||
| Depreciation | ||||||
| Cash flow | ||||||
| b. | ||||||
| Earnings before depreciation and taxes | ||||||
| Depreciation | ||||||
| Earnings before taxes | ||||||
| Taxes | ||||||
| Earnings after taxes | ||||||
| Depreciation | ||||||
| Cash flow | ||||||
| c. | ||||||
| Cash flow benefit | ||||||
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