Montejo corporation expects 2010 sales to be $12 million. Operating costs other
ID: 2681701 • Letter: M
Question
Montejo corporation expects 2010 sales to be $12 million. Operating costs other than depreciation are expected to be 75 percent of sales, and depreciation is expected to be $1.5 million in 2010. all sales revenues will be collected in cash, and costs other than depreciation must be paid during the year. Montejo's interest expense is expected to be $1 million, and it is taxed at a 40 percent rate.......................... A. set up an income statement and a cash flow statement (use 2 columns on one page) for Montejo. what is the expected cash flow from operations?................. B. Suppose Congress changed the tax laws so that Montejo's depreciation expenses doubled in 2010, but no other changes occured. What would happen to the net income and cash flow from operations expected in 2010?.............. C. Suppose that Congress, rather than increasing Montejo's 2010 depreciation, reduced it by 50 percent. How would the icnome and cash flows be affected?............... D.If this company belonged to you, would you prefer that Congress increase or decrease the depreciation expense allowed your company? explain why?Explanation / Answer
a.Operating Cash Flows: t = 1
Sales revenues $12,000,000
Operating costs 9,000,000
Depreciation 1500,000
Interest expense 100000
Operating income before taxes $ 1,400,000
Taxes (40%) 560,000
Operating income after taxes $ 840,000
Add back depreciation 1500,000
Add bad interest 100000
Operating cash flow $ 2,440,000
b. If depreciation expenses doubled
Sales revenues $12,000,000
Operating costs 9,000,000
Depreciation 3000,000
Interest expense 100000
Operating income before taxes $ -100000
Taxes (40%) -
Operating income after taxes $ -100000
Add back depreciation 3000,000
Add bad interest 100000
Operating cash flow $ 3000,000
c.If depreciation, is reduced by 50 percent
Sales revenues $12,000,000
Operating costs 9,000,000
Depreciation 750,000
Interest expense 100000
Operating income before taxes $ 2150,000
Taxes (40%) 860,000
Operating income after taxes $ 1290,000
Add back depreciation 750000
Add bad interest 100000
Operating cash flow $2140000
d. since the operating cashflow is the highest in the 2nd option, we will prefer when the government doubles the depreciation exp.