Last year Tiemann Technologies reported $10,500 of sales,$6,250 of operating costs other than depreciation,and $1,300 of depreciation.The company had no amortization charges,it had $5,000 of bonds that carry a 6.5% interest rate,and its federal-plus-state income tax rate was 35%.This year's data are expected to remain unchanged except for one item,depreciation,which is expected to increase by $750.By how much will net after-tax income change as a result of the change in depreciation? The company uses the same depreciation calculations for tax and stockholder reporting purposes.

Question

Quizplus · Accepted Answer

This problem can be worked very easily-just multiply the increase in depreciation by (1 - T)to get the decrease in net income:
 Change in depreciation                     $750
Tax rate                                   $35\%$
Reduction in net income         $ -\$ 487.50 $ 
We can also get the answer a longer way,which explains things more clearly:
 11ea42d0_c060_51f6_9abf_5ddadf6df88f_TB2090_00

Last Year Tiemann Technologies Reported $10,500 of Sales,$6,250 of Operating