The tax shield approach to computing the operating cash flow, given a tax-paying firm: Select one: a. separates cash inflows from cash outflows. b. considers the changes in net working capital resulting from a new project. c. recognizes that depreciation creates a cash inflow. d. ignores all noncash expenses and their effects. e. ignores both interest expense and taxes.

Question

Business

Castaneda

26 December, 11:40

The tax shield approach to computing the operating cash flow, given a tax-paying firm: Select one: a. separates cash inflows from cash outflows. b. considers the changes in net working capital resulting from a new project. c. recognizes that depreciation creates a cash inflow. d. ignores all noncash expenses and their effects. e. ignores both interest expense and taxes.

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Beasley · Answer 1

c. recognizes that depreciation creates a cash inflow

Explanation:

The formula to compute the operating cash flow is shown below:

Operating cash flow = Earning before interest and taxes + Depreciation - Income tax expense

Since as we can see that after computing the earning before interest and taxes we added back the depreciation expense and deduct the income tax expense so that the proper value could arrive

Hence, option c is correct