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Linda is excited about a new project and goes about evaluating it. She is a bit unclear about how changes in

depreciation impact Free Cash Flows (FCFs), and seeks guidance from Shelby. Shelby makes the following two statements: "All else equal, higher depreciation expenses will result in larger FCF and lower net income. The specific impact of changes in depreciation expenses on FCFs can be discerned by multiplying the incremental depreciation expense by the tax rate."

Is Shelby's comment on the relationship between depreciation and FCFs and net income accurate? Discuss briefly.

Top Answer

Yes, Shelby' comment is absolutely correct. A Depreciation Expense is the one which is not incurred in Cash, thus it has no... View the full answer

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