Depreciation expense and accounting cash flow

Assignment Help Finance Basics

Reference no: EM1354692

MACRS depreciation expense and accounting cash flow
Pavlovich Instruments, Inc., a maker of precision telescopes, expects to report pre-tax income of $430,000 this year. The company's financial manager is considering the timing of a purchase of new computerized lens grinders. The grinders will have an installed cost of $80,000 and a cost recovery period of 5 years. They will be depreciated using the MACRS schedule.
a. If the firm reduces its reported income by the amount of the depreciation expense calculated below, what tax savings will result?
b. Assuming that Pavlovich does purchase the grinders this year and that they are its only depreciable asset, find the firm's cash flow from operations for the year.

Calculated depreciation expense
Year Cost Percentages Depreciation
1 $80,000 20% $16,000
2 $80,000 32 $25,600
3 $80,000 19 $15,200
4 $80,000 12 $9,600
5 $80,000 12 $9,600
6 $80,000 5 $4000

Finding operating and free cash flows
Consider the balance sheets and selected data from the income statement of Keith Corporation that can be found below, then prepare answers for the following questions:
a. Calculate the firm's accounting cash flow from operations for the year ended December 31, 2009,
b. Calculate the firm's net operating profit after taxes (NOPAT) for the year ended December 31, 2009,.
c. Calculate the firm's operating cash flow (OCF) for the year ended December 31, 2009, using Equation 3.3.
d. Calculate the firm's free cash flow (FCF) for the year ended December 31, 2009,
e. Interpret, compare, and contrast your cash flow estimates in parts a, c, and d.

Keith Corporation Balance sheets
December 31
Assets 2009 2008
Cash 1500 1000
Marketable securities 1800 1200
Accounts receivable 2000 1800
Inventories 2900 2800
Total current assets $8200 $6800
Gross fixed assets $29500 $28100
Less Accumulated Depreciation $14,700 $13,100
Net fixed assets $14,800 $15,000
Total assets $23,000 $21,800

Liabilities and Stockholder's Equity
Accounts payable $1,600 $1,500
Notes payable $2,800 $2,200
Accruals 200 300
Total current liabilities $4,600 4,000
Long-term debt $5,000 $5,000
Common stock $10,000 $10,000
Retained earnings $3,400 $2,800
Total stockholder's equity $13,400 $12,800
Total liabilities and stockholder's equity $23,000 $21,800

Income Statement Data (2009)
Depreciation expense $1600
Earnings before interest and taxes $2,700
Interest expense $367
Net profits after taxes $1,400
Tax rate 40%

Cash budget - Basic
Grenoble Enterprises had sales of $50,000 in March and $60,000 in April. Forecast sales for May, June, and July are $70,000, $80,000, and $100,000, respectively. The firm has a cash balance of $5,000 on May 1 and wishes to maintain a minimum cash balance of $5,000. Given the following data, prepare and interpret a cash budget for the months of May, June, and July.
1) The firm makes 20% of sales for cash, 60% are collected in the next month, and the remaining 20% are collected in the second month following sale.
2) The firm receives other income of $2,000 per month.
3) The firm's actual or expected purchases, all made for cash, are $50,000, $70,000, and $80,000 for the months of May through July, respectively.
4) Rent is $3,000 per month.
5) Wages and salaries are 10% of the previous month's sales.
6) Cash dividends of $3,000 will be paid in June.
7) Payment of principal and interest of $4,000 is due in June.
8) A cash purchase of equipment costing $6,000 is scheduled in July.
9) Taxes of $6,000 are due in June.

Reference no: EM1354692

Questions Cloud

What horizontal direction should the quarter back aim : Coherent light with wavelength 609 passes through two very narrow slits, and interference pattern is observed on a screen a distance of 3 from the slits.

Explain illegal means to get plaintiffs to drop their cases : Explain Pursue illegal means to get plaintiffs to drop their cases and Use the system to make the case too expensive for plaintiffs to pursue their cases

Which basket of goods and services selected to calculate cpi : Suppose a basket of goods and services has been selected to calculate the CPI.

Show high possibility of organizational silence : Consider the issue of organizational silence. What factors in an organization would lead to a high possibility of organizational silence? What techniques would be useful in reducing the possible negative effects of organizational silence?

Depreciation expense and accounting cash flow : Pavlovich Instruments, Corporation, a creator of precision telescopes, expects to report pre-tax income of $430,000 this year. The firm's financial manager is planning the timing of a purchase of new computerized lens grinders.

Walmart strategic audit : Prepare a strategic audit for Wal-Mart. Write a synopsis for Wal-Mart, covering the following points:

Employee negative responses - organizational development : what barriers of change are likely to be encountered in this situation, and what steps would you propose to overcome them?

Elucidate how scarcity of resources influences this market : Elucidate how scarcity of resources influences this market and describe the choices stakeholders are forced to make.

Beck depression inventory : What is an example of how to use IS PATH WARM for suicide assessment? Does this replace depression assessments, such as the Beck Depression Inventory II?

User Account

All Pages