An investment of $120,000 can be depreciated for tax purposes straight line over 6 years.The corporate tax rate is 40%.When calculating cash flow:

Question

Quizplus · Accepted Answer

Depreciation is a non-cash expense that reduces the value of an asset over time. However, it provides a tax shield because it is allowed as a deduction when calculating taxable income. In this case, the depreciation expense is $120,000/6 years = $20,000 per year. The tax shield is then calculated as $20,000 x 40% = $8,000 per year. Therefore, when calculating cash flow, the company should add the $8,000 depreciation tax shield to after-tax (revenues less cash expenses), which results in a higher cash flow. Thus, option B is the correct answer.

An Investment of $120,000 Can Be Depreciated for Tax Purposes