Depreciation must be considered when evaluating the incremental operating cash flows associated with a capital budgeting project because
A)it represents a tax-deductible cash expense.
B)the firm has a cash outflow equal to the depreciation expense each year.
C)although it is a non-cash expense, depreciation has an impact on the taxes paid by the firm, which is a cash flow.
D)depreciation is a sunk cost.
E)None of the above is correct.

Question

Quizplus · Accepted Answer

Depreciation is a non-cash expense, but it affects the taxes the firm has to pay, which is a cash flow. Depreciation is tax-deductible, and as a result, reduces a firm's taxable income. Therefore, taking depreciation into account is essential when evaluating a project's incremental operating cash flows, as it can impact the amount of taxes the firm has to pay, and ultimately affect the project's profitability.

Depreciation Must Be Considered When Evaluating the Incremental Operating Cash