A project's depreciation expense must be considered when evaluating its incremental operating cash flows because:
A)depreciation represents a tax-deductible cash expense.
B)the firm incurs a cash payment equal to the depreciation expense each year.
C)depreciation has an impact on the taxes paid by the firm, which is a cash flow.
D)depreciation is a sunk cost.
E)depreciation is a fixed cash payment that the firm receives each year.

Question

Quizplus · Accepted Answer

Depreciation is a non-cash expense, but it has a significant impact on the taxes paid by the firm. The depreciation expense is tax-deductible, which reduces the taxable income of the firm, and therefore reduces the taxes paid by the firm. As taxes are a cash flow, the impact of depreciation on taxes must be considered when evaluating a project's incremental operating cash flows.

A Project's Depreciation Expense Must Be Considered When Evaluating Its