If inflation is forecast to increase,which of the company's following cash flows is most likely to change?
A) The depreciation tax shield.
B) Labor costs.
C) Costs of raw materials purchased on a fixed price contract.
D) Interest payments on its long-term debt.

Question

Quizplus · Accepted Answer

Labor costs are likely to increase in response to inflation, as wages and salaries tend to rise with increases in the cost of living. The other options are less likely to be directly affected by inflation forecasts; the depreciation tax shield depends on the firm's accounting policies, the costs of raw materials on fixed price contracts are typically locked in regardless of inflation, and interest payments on long-term debt are typically fixed or subject to contractual adjustments that may not depend on changes in inflation forecasts.

If Inflation Is Forecast to Increase,which of the Company's Following