Hi could somebody please explain this. CFA EOC Corporate finance pg 48 How would a higher than expected inflation rate effect the value of real tax savings from depreciation… Question asks if savings will be higher or lower Since depreciation is based on FIXED Historical cost Shouldnt the answer be Lower savings? Answer is higher This is confusing:(
Firstly there is an errata on this Q; answer choice is A (explanation is correct but they mistakenly but B as the choice). Secondly, if inflation is higher than your interest expense is less as is the value of your tax savings. I think the first point is tripping you up, as you have the logic right but are thinking the answer is choice B, which says higher.
Guess that explains it. Thanks the show NY