Brandywine Homecare, a not for hire business, had revenues of $12 million in 2011. Expenses other than depreciation totaled 75 percent of revenues, and depreciation expense was $1.5 million. All revenues were collected in cash during the yar and all expenses other than depreciation were paid in cash during the year and all expenses other than depreciation were paid in cash.
a. Construct Brandywine’s 2011 income statement.
b. What are Brandywine’s net income, total profit margin, and cash flow?
c. Now, suppose the company changed its depreciation calculation procedures (still within GAAP such that its depreciation expense doubled. How would this change affect Brandywine’s net income, total profit margin, and cash flow?
d. Suppose the change had halved, rather than doubled, the firm’s depreciation expense. Now, what would be the impact on net income, total profit margin, and cash flow?
If you can earn a 3% average return on your investments, how much invested capital must you have to earn $98000.00 per year. Round your solution to the nearest penny if needed
d. net income $2,250,000
total profit margin 18.5%
cash flow $ 3,000,000
a. The income statement for Brandywine Homecare in 2011 would look like this:
| Revenue | $12,000,000 |
|------------------------|----------------|
| Expenses | |
| - Other expenses | $9,000,000 |
| - Depreciation expense | $1,500,000 |
|------------------------|----------------|
| Net Income | $1,500,000 |
b. Brandywine's net income is $1,500,000. The total profit margin is calculated by dividing the net income by the revenue:
Total profit margin = (Net Income / Revenue) * 100
= ($1,500,000 / $12,000,000) * 100
= 12.5%
The cash flow for Brandywine is the net income plus the depreciation expense:
Cash flow = Net Income + Depreciation Expense
= $1,500,000 + $1,500,000
= $3,000,000
c. If the depreciation expense is doubled to $3,000,000, the new net income would be calculated as follows:
New net income = Revenue - Expenses
= $12,000,000 - ($9,000,000 + $3,000,000)
= $12,000,000 - $12,000,000
= $0
The total profit margin would be 0% since there is no net income.
The cash flow would still be $3,000,000, as the change in depreciation does not affect the cash flow.
d. If the depreciation expense is halved to $750,000, the new net income would be calculated as follows:
New net income = Revenue - Expenses
= $12,000,000 - ($9,000,000 + $750,000)
= $12,000,000 - $9,750,000
= $2,250,000
The total profit margin would be calculated as before:
Total profit margin = (Net Income / Revenue) * 100
= ($2,250,000 / $12,000,000) * 100
= 18.75%
The cash flow would still be $3,000,000, as the change in depreciation does not affect the cash flow.
a. To construct Brandywine's 2011 income statement, we will use the information given:
Revenue: $12 million
Expenses other than depreciation: 75% of revenues
Depreciation expense: $1.5 million
First, let's calculate the expenses other than depreciation:
Expenses other than depreciation = 75% of revenues = 0.75 * $12 million = $9 million
Now, we can construct the income statement:
Revenue: $12 million
Expenses:
- Expenses other than depreciation: $9 million
- Depreciation expense: $1.5 million
Net income can be calculated as the difference between revenue and total expenses:
Net income = Revenue - Total Expenses
Net income = $12 million - ($9 million + $1.5 million)
Net income = $1.5 million
b. To calculate Brandywine's net income, total profit margin, and cash flow, we use the following formulas:
Net income = Revenue - Total Expenses
Net income = $12 million - ($9 million + $1.5 million)
Net income = $1.5 million
Total profit margin = (Net income / Revenue) * 100
Total profit margin = ($1.5 million / $12 million) * 100
Total profit margin = 12.5%
Cash flow is the difference between total cash inflows and total cash outflows.
In this case, all revenues were collected in cash, and all expenses were paid in cash. Therefore, the cash flow is equal to net income.
Cash flow = Net income = $1.5 million
c. If the company doubled its depreciation expense, let's calculate the new net income, total profit margin, and cash flow.
New depreciation expense = $1.5 million * 2 = $3 million
New net income:
Net income = Revenue - Total Expenses
Net income = $12 million - ($9 million + $3 million)
Net income = $12 million - $12 million
Net income = $0
Total profit margin = (Net income / Revenue) * 100
Total profit margin = ($0 / $12 million) * 100
Total profit margin = 0%
Cash flow remains unchanged as there is no change in the cash collected or paid.
Cash flow = Net income = $0
d. If the company halved its depreciation expense, let's calculate the impact on net income, total profit margin, and cash flow.
New depreciation expense = $1.5 million / 2 = $0.75 million
New net income:
Net income = Revenue - Total Expenses
Net income = $12 million - ($9 million + $0.75 million)
Net income = $12 million - $9.75 million
Net income = $2.25 million
Total profit margin = (Net income / Revenue) * 100
Total profit margin = ($2.25 million / $12 million) * 100
Total profit margin = 18.75%
Cash flow remains unchanged as there is no change in the cash collected or paid.
Cash flow = Net income = $2.25 million
Please note that this analysis assumes all other factors remain constant.