Assume a corporation has earnings before depreciation and taxes of $100,000, depreciation of $40,000, and that it has a 30 percent tax bracket. What are the after-tax cash flows for the company?

Question 17 answers

Earnings AFTER depreciation is 60,000, and the (30%) tax on that taxable income is 18,000.

After-tax cash flow is then 100,000 - 18,000 = $82,000.

To calculate the after-tax cash flows for the company, we need to consider two main components: depreciation and taxes.

1. Depreciation: Since depreciation is a non-cash expense, it does not affect the company's cash flow. Therefore, we can consider the earnings before depreciation and taxes as the company's cash flow before taxes.

Earnings before depreciation and taxes: $100,000

2. Taxes: To calculate the taxes, we need to multiply the earnings before depreciation and taxes by the tax rate.

Tax rate: 30%

Tax = Earnings before depreciation and taxes * Tax rate
= $100,000 * 30%
= $30,000

After-tax cash flows = Earnings before depreciation and taxes - Tax
= $100,000 - $30,000
= $70,000

Therefore, the after-tax cash flows for the company are $70,000.

To calculate the after-tax cash flows for the company, we need to deduct the taxes from the earnings before depreciation and taxes (EBDT) and add back the depreciation.

1. Calculate the taxable income:
Taxable Income = EBDT - Depreciation

Taxable Income = $100,000 - $40,000 = $60,000

2. Calculate the taxes:
Taxes = Taxable Income * Tax Rate

Tax Rate = 30% (as given)

Taxes = $60,000 * 0.30 = $18,000

3. Calculate the after-tax cash flows:
After-Tax Cash Flows = EBDT - Taxes + Depreciation

After-Tax Cash Flows = $100,000 - $18,000 + $40,000 = $122,000

Therefore, the after-tax cash flows for the company are $122,000.