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 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?
A)The firm's operating income (EBIT) would increase.
B)The firm's taxable income would increase.
C)The firm's net cash flow would increase.
D)The firm's tax payments would increase.
E)The firm's reported net income would increase.

Question

Quizplus · Accepted Answer

With a shorter depreciation period, the firm would have higher depreciation expenses each year, reducing taxable income and thus tax payments, leading to an increase in net cash flow.

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