Discussion
Assertion: depreciation affects a project's cash flow. Reason: it reduces the tax payable.
Answer: C
Correct answer: both the assertion and the reason are true and the reason explains the assertion
Both are true and the reason is the only mechanism by which the effect occurs. Depreciation moves no money itself, but it reduces taxable income and hence the tax actually paid, and that reduction is a real cash flow. This is why after-tax analysis must model depreciation and why the method chosen affects a project’s worth.
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