Why Is the Depreciation Tax Shield a Component of Analyzing

question 98

Multiple Choice

Why is the depreciation tax shield a component of analyzing investment decisions?

• A) Depreciation causes a cash outflow that is added to determine net income.
• B) Though no cash was paid out, depreciation was included on the tax return, which caused the company to have to pay taxes on the amount of depreciation.
• C) Depreciation lowers income tax expense to be paid, though no cash flow occurs for the depreciation amount.
• D) Depreciation creates cash flows that do not appear on the income statement.

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Definitions:

Inventory Turnover

A measure of how frequently a company sells and replaces its stock of goods during a period, indicating the efficiency of inventory management.

Asset Management

An orderly process for building, running, maintaining, and disposing of assets in a way that minimizes expenses.

Profitability

A measure of the efficiency of a company in generating profits from its operations, often expressed as a percentage of revenues.

Debt

Money owed by one party to another under the condition that it will be repaid, often with interest, at a future date.