hard · Investment Banking accounting
A company is considering whether to capitalize or expense $500 million in software development costs. Over a 5-year period (straight-line depreciation), which statement accurately describes the cumulative effect on Unlevered Free Cash Flow (UFCF) by the end of Year 5? Assume a 30% tax rate and no salvage value.
- Capitalizing results in lower cumulative UFCF because of higher cumulative taxes.
- Expensing results in higher cumulative UFCF because of the time value of money.
- Capitalizing results in higher cumulative UFCF due to higher EBITDA.
- Cumulative UFCF is identical under both methods.
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