Question

Suppose a firms tax rate is 35%.
a.What effect would a $10 million operating expense have on this year's earnings? What effect would it have on next years's earnings?
b. What effect would a $10 million capital expense have on this year's earnings if the capital is depreciated at a rate of $2 million per year for five year? What effect would it have on next years earnings?

Answer 1

a. reduce taxable operating earnings by $10m. no effect on next year's earnings. b. taxable earnings reduced by $2m for each of five years.