DeYoung Devices Inc., a new high-tech instrumentation firm, is building and equipping a new manufacturing facility.Assume that currently its equipment must be depreciated on a straight-line basis over 10 years, but Congress is considering legislation that would require the firm to depreciate the equipment over 7 years.If the legislation becomes law, which of the following would occur in the year following the change?

Question

Quizplus · Accepted Answer

If the depreciation period is shortened from 10 years to 7 years, the annual depreciation expense will increase. This reduces taxable income, leading to lower tax payments, which in turn increases net cash flow from operations. Operating income (EBIT) is not affected by depreciation changes as it is calculated before interest and taxes. Net income would decrease due to higher depreciation expenses, and tax payments would decrease, not increase, due to the lower taxable income.