Rucker Truck Line (RTL) is evaluating whether the fleet of trucks it owns should be replaced.If the trucks are replaced, current operating revenues and expenses will not change, except for depreciation expenses.Annual depreciation will increase from $150,000 to $175,000.Based on this information, how will the change in depreciation expense affect the incremental operating cash flows RTL examines when making its capital budgeting decision about replacing the trucks? RTL's marginal tax rate is 40 percent.
A)After-tax operating cash flows will increase by $15,000.
B)After-tax operating cash flows will increase by $10,000.
C)After-tax operating cash flows will decrease by $25,000.
D)After-tax operating cash flows will decrease by $10,000.
E)Because depreciation is a non-cash expense, operating cash flows should not change.

Question

Quizplus · Accepted Answer

The increase in depreciation is a non-cash expense, but it affects taxable income. The tax shield from the additional $25,000 depreciation is $25,000 * 40% = $10,000, which increases after-tax operating cash flows by $10,000.

Rucker Truck Line (RTL) Is Evaluating Whether the Fleet of Trucks