An investor purchased a building in 1982 when the building could be depreciated over 19 years.A new investor is interested in purchasing the building in 1992 when the depreciable life according to tax laws is 31.5 years.Assuming both investors are in the same tax bracket and that everything else is equal,what can be said about the after-tax cash flow received by the new investor as compared to the after-tax cash flow that would be received by the original owner of the building?

Question

Quizplus · Accepted Answer

The new investor will have a lower after-tax cash flow because the depreciable life has been extended, which means that the annual depreciation expense will be lower. This reduced depreciation expense will result in a higher taxable income for the owner and a higher tax liability, leading to a lower after-tax cash flow.

An Investor Purchased a Building in 1982 When the Building