Nokela Industries purchases a $40 million cyclo-converter. The cyclo-converter will be depreciated...

Question

Nokela Industries purchases a $40 million cyclo-converter. The cyclo-converter will be depreciated by $10 million per year over four years, starting this year. Suppose Nokela’s tax rate is 40%.

a. What impact will the cost of the purchase have on earnings for each of the next four years?

b. What impact will the cost of the purchase have on the firm’s cash flow for the next four years?

David · Accepted Answer

Solution : 
(a) Impact on earnings: 
 Nokela industries purchase cyco-converter with following details:  
Purchase price = $40 million  
Depreciation = $10 million  
Tax rate = 40%  
Following is the calculation of impact of purchase on the earnings in spreadsheet: 
Asset purchanging value 40000000
Depreciation each year 10000000
tax rate 0.

Nokela Industries purchases a $40 million cyclo-converter. The cyclo-converter will be depreciated by $10 million per year over four years, starting this year. Suppose Nokela’s tax rate is 40%. a....

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