Answer:
a. The firm’s net income and net cash flow is $3.77 million and $7.17 million respectively
b. The firm’s net income and net cash flow is $2.21 million and $8.01 million respectively
Explanation:
a. The computation of the net income is shown below:
= Sales - cost of good sold - depreciation expense - interest expense - income tax expense
where,
Income tax expense = (Sales - cost of good sold - depreciation expense - interest expense) × income tax rate
= ($21.00 million - $9.40 million - $3.40 million - $2.40 million) × 35%
= $2.03 million
The other items values would remain the same
Now put these values to the above formula
So, the value would equal to
= $21.00 million - $9.40 million - $3.40 million - $2.40 million - $2.03 million
= $3.77 million
And the net cash flow = Net income + depreciation expense
= $3.77 million + $3.40 million
= $7.17 million
b. The computation of the change in the net income is shown below:
= Sales - cost of good sold - increased depreciation expense - interest expense - income tax expense
where,
Income tax expense = (Sales - cost of good sold - increased depreciation expense - interest expense) × income tax rate
= ($21.00 million - $9.40 million - $5.80 million - $2.40 million) × 35%
= $1.19 million
The other items values would remain the same
Now put these values to the above formula
So, the value would equal to
= $21.00 million - $9.40 million - $5.80 million - $2.40 million - $1.19 million
= $2.21 million
And the net cash flow = Net income + increased depreciation expense
= $2.21 million + $5.80 million
= $8.01 million
