The Menendez Corporation expects to have sales of $12 million. Costs other than depreciation are expected to be 75 percent of sales, and depreciation is expected to be $1.5 million. All sales revenues will be collected in cash, and costs other than depreciation must be paid for during the year. Menendez's federal-plus-state tax rate is 40 percent.
1) PLEASE set up an income statement. What is Menendez's expected net cash flow?
[Please show the computing steps by which the answer to this problem was derived].
2) Suppose Congress changed the tax laws so that Menendez's depreciation expenses doubled. No changes in operations occurred. What would happen to reported profit and to net cash flow?
[Please show the computing steps by which the answer to this problem was derived].
3) Now suppose that Congress, instead of doubling Menendez's depreciation, reduced it by 50 percent. How would profit and net cash flow be affected?
[Please show the computing steps by which the answer to this problem was derived].
4) If this were your company, would you prefer Congress to cause your depreciation expense to be doubled or halved? Why? [Briefly explain].