Which action would increase after-tax cash flow for a project, assuming other factors constant?

Which action would increase after-tax cash flow for a project, assuming other factors constant?

• A. Increase depreciation
• B. Increase financing costs
• C. Increase taxes
• D. Increase revenue without increasing expenses

Answer: (A)

Depreciation provides a tax shield that boosts after-tax cash flow. It lowers taxable income, so the Taxes paid drop. Since taxes are cash outflows, reducing them directly increases the cash the project keeps. Although depreciation is a non-cash expense, the tax savings it produces are real cash benefits, captured in the after-tax cash flow through the depreciation tax shield (tax rate times depreciation). Increasing depreciation raises this shield, improving cash flow while other factors stay the same. Financing costs are cash outlays tied to how the project is funded, not operating cash flow, so they don’t create a tax shield. Increasing taxes directly reduces cash flow. Increasing revenue without increasing expenses raises pre-tax income and taxes, so after-tax cash flow may rise or fall depending on the tax rate, but it doesn’t provide the same reliable tax-saving benefit as depreciation.

Depreciation provides a tax shield that boosts after-tax cash flow. It lowers taxable income, so the Taxes paid drop. Since taxes are cash outflows, reducing them directly increases the cash the project keeps. Although depreciation is a non-cash expense, the tax savings it produces are real cash benefits, captured in the after-tax cash flow through the depreciation tax shield (tax rate times depreciation). Increasing depreciation raises this shield, improving cash flow while other factors stay the same.

Financing costs are cash outlays tied to how the project is funded, not operating cash flow, so they don’t create a tax shield. Increasing taxes directly reduces cash flow. Increasing revenue without increasing expenses raises pre-tax income and taxes, so after-tax cash flow may rise or fall depending on the tax rate, but it doesn’t provide the same reliable tax-saving benefit as depreciation.