In: Economics
Suppose Congress changed the tax laws so that Berndt's
depreciation expenses doubled. No changes in operations occurred.
What would happen to reported profit and to net cash flow?
-Select-IIIIIIIVV
I. If depreciation doubled, taxable income would
not be affected since depreciation and amortization are non-cash
expenses. Net cash flow would also be unaffected.
II. If depreciation doubled, taxable income would
not be affected since depreciation and amortization are non-cash
expenses. Net cash flow would double.
III. If depreciation doubled, taxable income would
fall to zero, taxes would be zero, and net cash flow would be
unaffected.
IV. If depreciation doubled, taxable income would
fall to zero, taxes would be zero, and net cash flow would
rise.
V. If depreciation doubled, taxable income would
fall to zero, taxes would be zero, and net cash flow would
decline.
Now suppose that Congress changed the tax law such that, instead
of doubling Berndt's depreciation, it was reduced it by 50%. How
would profit and net cash flow be affected?
-Select-IIIIIIIVV
I. If depreciation were halved, taxable income and
taxes would rise but net cash flow would fall.
II. If depreciation were halved, taxable income,
taxes, and net cash flow would all rise.
III. If depreciation were halved, taxable income
and taxes would decline but net cash flow would rise.
IV. If depreciation were halved, taxable income,
taxes, and net cash flow would all decline.
V. If depreciation were halved, taxable income and
net cash flow would rise but taxes would fall.
If this were your company, would you prefer Congress to cause
your depreciation expense to be doubled or halved? Why?
-Select-IIIIIIIVV
I. You should prefer to have higher depreciation
charges and therefore higher net income. Net cash flows are the
funds that are available to the owners to withdraw from the firm
and, therefore, cash flows should be more important to them than
net income.
II. You should prefer to have higher depreciation
charges and therefore higher cash flows. Net cash flows are the
funds that are available to the owners to withdraw from the firm
and, therefore, cash flows should be more important to them than
net income.
III. You should prefer to have lower depreciation
charges and therefore higher cash flows. Net cash flows are the
funds that are available to the owners to withdraw from the firm
and, therefore, cash flows should be more important to them than
net income.
IV. You should prefer to have higher depreciation
charges and therefore higher net income. Net income represents the
funds that are available to the owners to withdraw from the firm
and, therefore, net income should be more important to them than
net cash flows.
V. You should prefer to have lower depreciation
charges and therefore higher net income. Net income represents the
funds that are available to the owners to withdraw from the firm
and, therefore, net income should be more important to them than
net cash flows.
1- suppose Congress changed the tax laws so that Berndt's
depreciation expenses doubled. No changes in operations occurred.
the following would happen to reported profit and to net cash
flow:
IV. If depreciation doubled, taxable income would fall to
zero, taxes would be zero, and net cash flow would
rise.
because depreciation is added in the calculation of net cash flow
2- Now suppose that Congress changed the tax law such that,
instead of doubling Berndt's depreciation, it was reduced it by
50%. How would profit and net cash flow be affected?
I. If depreciation were halved, taxable income and taxes
would rise but net cash flow would fall.
if depreciation decreases than the income will increase but net cash flow will decrease as net cash flow is the addition of income and depreciation.
3- If this were your company, would you prefer Congress to cause
your depreciation expense to be doubled or halved:
II. You should prefer to have higher depreciation charges
and therefore higher cash flows. Net cash flows are the funds that
are available to the owners to withdraw from the firm and,
therefore, cash flows should be more important to them than net
income.