Question

If a company that is in a 35 % tax bracket invests in assets that increase its depreciation expense by $ 562 per year, its change in cash flow is _________.
Enter your answer to the nearest $.01. Be sure to use a negative sign, if the answer is negative. Do not use $ or , signs in your answer.

Answer 1

Answer:

increase of 196.70 dollars

Explanation:

While the depreciation expense will not generate a cash outflow or inflow, the expense will impact the net income which determinates the incoem tax payable.

This change in the net income and therefore, the income tax will also change the cahsflow:

depreciation ( 1 - t ) = tax-shield

562 x 35% = 196.70

The increase in depreciation provides a 196.70 dollars tax shield which increases the cash flow generate for the year.