Homework Answers
Given,
Annual depreciation will increase from $150000 to $175000
Tax rate = 40%
Solution :-
Increase in depreciation = $175000 - $150000 = $25000
Incremental depreciation tax shield = Increase in depreciation x Tax rate
= $25000 x 40% = $10000
As a result of increase in depreciation tax shield, after tax operating cash flows will increase by $10000.
Thus, option 'b' is correct.
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