With a $10 depreciation increase, what is the impact on Cash Flow from Operations?

With a $10 depreciation increase, what is the impact on Cash Flow from Operations?

• A. Up $10
• B. Up $4
• C. No change
• D. Down $4

Answer: (B)

Depreciation is a non-cash expense, but it reduces taxable income and creates a tax shield. When depreciation increases by 10, taxes payable drop by the tax rate times 10. If the corporate tax rate is 40%, the tax savings are 0.40 × 10 = 4. In the cash flow from operations, you start from net income and add back non-cash charges like depreciation, but the net effect of the higher depreciation is the tax shield, which raises CFO by 4. So, with a $10 depreciation increase, CFO increases by $4. The other options would ignore the tax effect or assume no change, which isn’t correct because taxes matter for non-cash charges.

Depreciation is a non-cash expense, but it reduces taxable income and creates a tax shield. When depreciation increases by 10, taxes payable drop by the tax rate times 10. If the corporate tax rate is 40%, the tax savings are 0.40 × 10 = 4. In the cash flow from operations, you start from net income and add back non-cash charges like depreciation, but the net effect of the higher depreciation is the tax shield, which raises CFO by 4. So, with a $10 depreciation increase, CFO increases by $4. The other options would ignore the tax effect or assume no change, which isn’t correct because taxes matter for non-cash charges.