Gabbert’s Corporation expects to have sales of $15 million. Costs other than depreciations are expected to be 77% of sales, and depreciation is expected to be $1.8 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 25%. Interest expense is $210,000. 1. Set up an income statement. What is Gabbert’s expcted net income? Its expected net cash flow? 2. Suppose Congress changed the tax laws so that Gabbert’s depreciation expenses went up by 60%. No changes in operations occurred. What would happen to the reported profit and to net cash flow? 3. Now suppose that Congress changed the tax laws such that, instead of increasing Gabbert’s depreciation, it was reduced by 60%. How would the profit and the net cash flow be affected? 4. If this were your company, would you prefer Congress to cause your depreciation expense to be increased or reduced? Why?
Gabbert’s Corporation expects to have sales of $15 million. Costs other than depreciations are expected to be 77% of sales, and
1. Set up an income statement. What is Gabbert’s expcted net income? Its expected net cash flow?
2. Suppose Congress changed the tax laws so that Gabbert’s depreciation expenses went up by 60%. No changes in operations occurred. What would happen to the reported profit and to net cash flow?
3. Now suppose that Congress changed the tax laws such that, instead of increasing Gabbert’s depreciation, it was reduced by 60%. How would the profit and the net cash flow be affected?
4. If this were your company, would you prefer Congress to cause your depreciation expense to be increased or reduced? Why?
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