medium · Investment Banking
A company with a 30% marginal tax rate switches a 100,000 annual lease from operating to finance. In the first year, it recognizes70,000 in depreciation and $40,000 in interest.
What is the net impact on Year 1 Cash Flow from Operations (CFO)?
- CFO increases by 3,000 due to the tax shield on the additional10,000 of early-year expenses.
- CFO remains identical because the total cash paid to the lessor ($100,000) has not changed.
- CFO increases significantly because the $70,000 in depreciation is added back to Net Income.
- CFO decreases because the total expense (110,000) is higher than the original rent (100,000).
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