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If depreciation increases by 100 with a 25% tax rate, what happens to net income?

  1. A It decreases by 75
  2. B It decreases by 100
  3. C It increases by 25
  4. D It is unchanged
Answer

It decreases by 75

The pre-tax reduction of 100 is offset by a 25 tax saving, so net income falls by 75 while cash increases by 25.

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