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

The difference between straight-line depreciation and MACRS is the timing and amount of depreciation expense each year. MACRS allows for a larger depreciation expense in the earlier years, resulting in lower taxable income and higher operating cash flows. Therefore, Firm B will have a higher operating cash flow in year two compared to Firm A. The other options are not necessarily true and can vary depending on the details of each firm's depreciation schedule and equipment value.

Firm a Uses Straight-Line Depreciation