A Start-Up Firm Is Making an Initial Investment in New

question 10

Multiple Choice

A start-up firm is making an initial investment in new plant and equipment. Assume that currently its equipment must be depreciated on a straight-line basis over 10 years, but Congress is considering legislation that would require the firm to depreciate the equipment over 7 years. If the legislation becomes law, which of the following would occur in the year following the change?

• A) The firm's operating income (EBIT) would increase.
• B) The firm's taxable income would increase.
• C) The firm's net cash flow would increase.
• D) The firm's tax payments would increase.
• E) The firm's reported net income would increase.

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Definitions:

Labor

Work performed by people that contributes to the production of goods and services in an economy.

Marginal Tax Rate

The rate at which the last dollar of income is taxed, indicating the percentage of additional income that is taken as tax.

Worker

An individual engaged in some form of productive labor, either as an employee, contractor, or self-employed person, contributing to the production of goods and services.

Producer Surplus

The difference between the amount a producer is paid for a good compared to the least amount they would accept to produce the good.