DeYoung Devices Inc., a new high-tech instrumentation firm, is building and equipping a new manufacturing facility.Assume that currently its equipment must be depreciated on a straight-line basis over 10 years, but Congress is considering legislation that would require the firm to depreciate the equipment over 7 years.If the legislation becomes law, which of the following would occur in the year following the change?

Question

Quizplus · Accepted Answer

Accelerating depreciation from 10 years to 7 years increases the depreciation expense in the early years. This reduces taxable income, leading to lower tax payments, which in turn increases net cash flow. Operating income (EBIT) is not affected by depreciation methods as it is calculated before depreciation. Taxable income and thus tax payments decrease, not increase, due to the higher depreciation expense. Net income decreases because of the higher depreciation expense.