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 R150,000 to R175,000.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.

Question

Quizplus · Accepted Answer

The increase in depreciation is a non-cash expense, but it provides a tax shield. The increase in depreciation is R25,000 (R175,000 - R150,000). The tax shield is 40% of this increase, which is R10,000 (0.40 * R25,000). Therefore, after-tax operating cash flows will increase by R10,000.

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