A start-up firm is making an initial investment in new plant and equipment. Currently equipment is depreciated on a straight line basis over 10 years. Assume that Congress is considering legislation which will allow the corporation to depreciate the equipment over 7 years. If the legislation becomes law, and the firm implements the 7-year depreciation basis, which of the following will occur?
A) The firm's tax payments will increase.
B) The firm's net income will increase.
C) The firm's taxable income will increase.
D) The firm's net cash flow will increase.
E) The firm's operating income (EBIT) will increase.

Question

Quizplus · Accepted Answer

When depreciation is accelerated to 7 years, the firm will have higher depreciation expenses in the earlier years, reducing taxable income and thus tax payments, leading to an increase in net cash flow.

A Start-Up Firm Is Making an Initial Investment in New