medium · Private Equity & LBOs

In a 3-statement model, how does a $10 million increase in depreciation affect the financial statements (assume a 25% tax rate)?

1. Net income drops by $2.5 million and cash increases by $7.5 million, and assets stay unchanged.
2. Net income drops by $7.5 million, cash increases by $2.5 million, and assets decrease by $7.5 million.
3. Cash increases by $7.5 million from the tax shield benefit, and total assets remain exactly the same as before.
4. Net income drops by $10 million, cash stays exactly the same, and no tax shield benefit is realized by the company.

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