A start-up firm is making an initial investment in new plant and equipment.Assume that currently its equipment must be depreciated on a straight-line basis over 10 years,but now the company is allowed to depreciate the equipment over 7 years.What would occur in the year following the change?

Question

Quizplus · Accepted Answer

By depreciating the equipment over a shorter period (7 years instead of 10), the firm will have higher depreciation expenses in the early years. This reduces taxable income, leading to lower taxes and thus increasing net cash flow. Operating income (EBIT) and reported net income would decrease due to higher depreciation expenses, and tax payments would decrease, not increase.

A Start-Up Firm Is Making an Initial Investment in New