Suppose a corporation can change its depreciation method so that its tax payments will decrease by $1,000 this year but increase by $1,000 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 change will increase the value of the company because the cash savings from lower tax payments this year ($1,000) exceeds the cost of higher tax payments next year ($1,000). The company will have more cash on hand this year, which can be invested or distributed to shareholders, increasing the value of the company. Investors may also view the ability to optimize tax payments positively, as it can demonstrate efficient management.

Suppose a Corporation Can Change Its Depreciation Method So That