i. If a company buys a factory for $100 with a useful life of ten years, using debt with a 5% interest rate, show me the changes at 40% tax rate
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godamn now i gotta learn this question while considering interest rate too... fckk
I won't give you a straight up answer because that's pointless if you don't understand the accounting, but here is what you need to think about.
At purchase you're going to be adding PPE and Debt to the balance sheet, consider how this is reflected on the cash flow statement as well.
Interest on the debt and depreciation on the factory will then be expensed over each of the next ten years, pretty easy to calculate the implications of this for taxes and net income, then you need to work out how it affects cash flow from operations and the balance sheet.
You didn't say anything about when principal on the debt would be repaid but if it's assumed that that happens in year 10 then that will need to be reflected in the cash flow statement and balance sheet.
Guess it depends on annual interest payments, how the 5% compounds, etc. - but basically for year one, $10 in depreciation, $5 in interest expense (just doing a basic annual 5% on outstanding $100), which equal $15 total in expenses, meaning $15*40% = 6 bucks less in taxes. Is that the question?
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