An Investor Purchased a Building in 1982 When the Building

question 17

Multiple Choice

An investor purchased a building in 1982 when the building could be depreciated over 19 years.A new investor is interested in purchasing the building in 1992 when the depreciable life according to tax laws is 31.5 years.Assuming both investors are in the same tax bracket and that everything else is equal,what can be said about the after-tax cash flow received by the new investor as compared to the after-tax cash flow that would be received by the original owner of the building?

• A)The new investor will have a higher after-tax cash flow because the depreciation expense will be lower
• B)The new investor will have a higher after-tax cash flow because the depreciation expense will be higher
• C)Both investors will have to use the 31.5 year depreciable life after 1986 so the after-tax cash flow will be equal
• D)The new investor will have a lower after-tax cash flow because the depreciation expense will be lower

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Definitions:

Federal Reserve

The central banking system of the United States, responsible for regulating the country's money supply and interest rates.

Lender of Last Resort

An institution, usually a country's central bank, that offers loans to banks or other eligible institutions that are experiencing financial difficulty or are considered highly risky or near collapse.

Board of Governors

The leading body of a central banking system that oversees policy and administration.

Money Supply

The entire amount of finances available in an economy, covering all forms of cash, coins, and the funds in checking and savings accounts, at a precise moment.