Question

See Table 2.5 LOADING... showing financial statement data and stock price data for Mydeco Corp. Suppose Mydeco had purchased additional equipment for $ 12.8 million at the end of 2016​, and this equipment was depreciated by $ 4.3 million per year in 2017​, 2018​, and 2019. Given​ Mydeco's tax rate of 35 %​, what impact would this additional purchase have had on​ Mydeco's net income in years 2016dash2019​? ​(Assume the equipment is paid for out of cash and that Mydeco earns no interest on its cash​ balances.)

Answer 1

Answer:

The net impact on the income will be 2,795,000 each year

Explanation:

The purchase will generate the followng:

4.3 depreciation expense

and a tax shield, as this expense decrease the net income:

depreciation x tax-rate = tax-shield

4.3 x 35% = 1.505 millions

total impact on net income:

depreciation expense - tax shield

4.3 - 1.505 = 2.795‬ millions net impact