Suppose a corporation can change its depreciation method so that its tax payments will decrease by $5,000 this year but increase by $5,000 next year.
A) The change will have no impact on the value of the company because its cash flow over time will be the same.
B) The change will decrease the value of the company because investors don't like changes in accounting methods.
C) The change will decrease the value of the company because lower tax payments this year result from lower reported income.
D) The change will increase the value of the company because the value of the cash savings this year exceeds the cost of the cash payments next year.

Question

Quizplus · Accepted Answer

The value of money is time-dependent, meaning that a dollar today is worth more than a dollar tomorrow due to the potential earning capacity. Therefore, saving $5,000 in taxes this year is more valuable than the additional $5,000 in taxes paid next year, potentially increasing the company's value.

Suppose a Corporation Can Change Its Depreciation Method So That