Question

Al's has a positive net income and a marginal tax rate of 34 percent. Given this, an increase in which one of the following will cause the operating cash flow to increase?

• A. Fixed assets

• B. Taxes

• C. Net working capital

• D. Cost of goods sold

• E. Depreciation

Answer 1

The correct answer is E. Depreciation

Depreciation is a non-cash expenditure. It is charged against income but it does not lead to an outflow of resources. It leads to savings in tax. Hence, higher the depreciation, higher will be the savings in tax and higher will be the operating cash flow

Increase in Fixed Assets. Taxes, Net Working Capital, Cost of goods sold will all lead to a decline in operating cash flows

Hence, the correct answer is E.