Question

Sports Biz, a profitable company, built and equipped a $2,000,000 plant brought into operation early in Year 1. Earnings of the company (before depreciation on the new plant and before income taxes) is projected at $1,500,000 in Year 1, $2,000,000 in Year 2, $2,500,000 in Year 3, $3,000,000 in Year 4, and $3,500,000 in Year 5. The company can use straight-line, double declining-balance, or sum-of-the-years'-digits depreciation for the new plant. Assume the plant's useful life is 10 years (with no salvage value) and an income tax rate of 50%.

Required:
Compute the separate effect that each of these three methods of depreciation would have on:
a. Depreciation
b. Income taxes
c. Net income
d. Cash flow (assumed equal to net income before depreciation)



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  • CreatedJanuary 22, 2015
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