Week 5 Assignment Problems 1 Macrs Depreciation Expense

1week 5 Assignment Problemsp1 Macrs Depreciation Expense And Acc

Analyze the MACRS depreciation expense and financial implications for Pavlovich Instruments, Inc., including the calculation of depreciation, tax savings, and cash flows. Calculate operational and free cash flows for Keith Corporation based on provided financial data. Prepare a detailed cash budget for Grenoble Enterprises considering sales, collections, expenses, and planned payments, including interpretation of cash flow management strategies.

Sample Paper For Above instruction

Introduction

The effective management of depreciation, cash flows, and operational finances is critical to a firm’s financial health and strategic planning. This paper explores the application of MACRS depreciation schedules for Pavlovich Instruments, Inc., evaluates operational and free cash flows for Keith Corporation, and develops a comprehensive cash budget for Grenoble Enterprises, illustrating key financial concepts and decision-making processes in corporate finance.

MACRS Depreciation and Tax Savings for Pavlovich Instruments, Inc.

Pavlovich Instruments plans to purchase new computerized lens grinders costing $80,000, with a 5-year recovery period. Using MACRS depreciation, the firm can accelerate depreciation deductions, thereby reducing taxable income and increasing cash flow in the initial years of asset life. According to Table 10.4 in Brooks’ text, the applicable depreciation percentages are approximately 20%, 32%, 19%, 12%, and 11% over the five-year period, with the exact percentages for the first year being 20%. This allows the company to claim a depreciation expense of $16,000 (20% of $80,000) in the first year.

Declining taxable income results in tax savings equal to the depreciation expense multiplied by the corporate tax rate. Given a tax rate of 40%, the tax savings in the first year amount to $6,400 ($16,000 × 40%). This tax benefit improves the company's cash flow by reducing tax payments, providing additional funds for other investments or operational needs.

Cash Flows Resulting from the Depreciation Deduction

Using the accounting definition, the firm's cash flow from operations (OCF) is calculated as:

OCF = [EBIT × (1 - T)] + Depreciation

Before depreciation, EBIT can be determined by subtracting expenses and taxes from pre-tax income. Assuming the pre-tax income of $430,000 remains unchanged and ignoring other expenses, the depreciation reduces taxable income, resulting in lower taxes paid, which signifies the tax shield benefit.

The net fixed asset investment (NFAI) is influenced by the purchase of the grinders, with its impact reflected as the initial outflow. The change in net fixed assets is $80,000, and accumulated depreciation further affects this value to calculate net fixed assets at year-end, which guides cash flow adjustments.

Analysis of Keith Corporation's Financial Data

Keith Corporation's figures highlight the following: the net profit after taxes is $1,400,000, and depreciation expenses are $1,600, contributing to cash flow calculations. Calculating the cash flow from operations involves adding back depreciation to net profits after taxes, yielding a cash inflow of $3,000,000. Meanwhile, NOPAT, which accounts for operational efficiency and tax impact, is determined by EBIT multiplied by (1 - T); here, EBIT is derived from pre-tax income, leading to a NOPAT of $1,620,000.

Operating cash flow (OCF), calculated as NOPAT plus depreciation, underscores liquidity generated by core business functions, amounting to $3,220,000. The free cash flow (FCF), in turn, considers capital expenditures and working capital changes, providing a comprehensive view of the firm's capacity to fund new investments or distribute dividends.

Cash Budgeting for Grenoble Enterprises

For Grenoble Enterprises, sales forecasts and collection patterns dictate cash inflows. The incremental costs, such as purchases, rent, wages, dividends, debt payments, and equipment purchases, determine cash outflows. A detailed budget shows that the company starts with a cash balance of $5,000, aiming to maintain this minimum each month while managing seasonal sales fluctuations.

The cash collection approach, recognizing 20% of sales as immediate cash, 60% collected in the subsequent month, and 20% in the following month, demonstrates the importance of timing in cash management. Expenses such as purchases and wages are scheduled monthly, with additional obligations like dividends, debt service, and equipment purchases affecting liquidity. The constructed cash budget indicates that in May, June, and July, the company’s cash balances fluctuate based on these inflows and outflows, with strategic planning needed to prevent cash shortages.

Interpretation and Recommendations

The analysis reveals the significance of accelerated depreciation in enhancing tax savings and cash flows for Pavlovich Instruments. For Keith Corporation, robust operational cash flows underscore financial stability, while free cash flows highlight investment capacity. Grenoble Enterprises’ cash budget underscores the importance of timing and planning in maintaining liquidity. Effective cash management, accurate forecasting, and understanding of depreciation and operational metrics are vital for sustaining growth and profitability in dynamic business environments.

Conclusion

This comprehensive review underscores the interconnected nature of depreciation scheduling, cash flow analysis, and budgeting in strategic financial management. Firms must leverage tools such as MACRS depreciation schedules and detailed cash budgeting to optimize tax benefits, ensure liquidity, and support long-term growth objectives. Continuous monitoring and adaptive planning remain essential in navigating the complexities of modern financial management.

References

  • Brooks, R. (2019). Financial Management for Managers (10th ed.). McGraw-Hill Education.
  • Brigham, E. F., & Ehrhardt, M. C. (2019). Financial Management: Theory & Practice (15th ed.). Cengage Learning.
  • Damodaran, A. (2012). Investment valuation: tools and techniques for determining the value of any asset (3rd ed.). Wiley.
  • Higgins, R. C. (2018). Analysis for Financial Management (12th ed.). McGraw-Hill Education.
  • Ross, S. A., Westerfield, R. W., & Jordan, B. D. (2020). Fundamentals of Corporate Finance (12th ed.). McGraw-Hill Education.
  • Palepu, K. G., & Healy, P. M. (2018). Business Analysis & Valuation: Using Financial Statements (6th ed.). Cengage Learning.
  • Schroeder, R. G., Clark, M. E., & Cathey, J. M. (2019). Financial Accounting Theory (13th ed.). Pearson.
  • Stickney, C. P., Brown, P., & Wahlen, J. (2019). Financial Reporting, Financial Statement Analysis, and Valuation (9th ed.). Cengage Learning.
  • Triantis, P. (2017). Corporate Financial Management. Routledge.
  • Weston, J. F., & Brigham, E. F. (2015). Managerial Finance (14th ed.). Cengage Learning.

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