Firm A uses straight-line depreciation.Firm B uses MACRS depreciation.Both firms bought $60,000 worth of equipment last year.Both firms are in the 35 percent tax bracket.The operating cash flows for each firm are identical except for the depreciation effects.Given this,you know the:

Question

Quizplus · Accepted Answer

Firm A's straight-line depreciation will result in a higher depreciation expense in the early years, leading to lower taxable income and therefore lower taxes paid. On the other hand, Firm B's MACRS depreciation will result in a greater tax benefit in the early years. However, since the operating cash flows are identical except for the depreciation effects, in year 2 Firm A will have a higher taxable income and will pay more taxes than Firm B. This will result in Firm A having a lower operating cash flow than Firm B, making C the correct answer. The other answer choices are not necessarily true and are not supported by the information given in the question.

Firm a Uses Straight-Line Depreciation