Question

If depreciation expense in year one of a project increases for a highly profitable​ company, A. the book value of the depreciating asset increases at the end of year one. B. net income decreases and incremental free cash flow increases. C. net income increases and incremental free cash flow increases. D. net income decreases and incremental free cash flow decreases.

Answer 1

B. net income decreases and incremental free cash flow increases

Step-by-step explanation:

Depreciation: The depreciation is an expense that shows a reduction in the value of the fixed assets due to tear and wear, obsolesce, usage, time period, etc. It is shown on the debit side of the income statement. It is a non-cash item that does not affect the cash balance.

In the given situation, if the depreciation expense is an increase so it affects the net income in an adverse manner while affecting the incremental free cash flow in a positively manner. As it shows a direct relationship between the depreciation and the free cash flows