If depreciation expense increases by $5m and the tax rate is 30%, what is the net cash impact?

• A. 0
• B. 1.5
• C. 3
• D. 7

Answer: (B)

Depreciation creates a tax shield. When depreciation goes up, taxable income falls and taxes owed drop by the depreciation amount times the tax rate. That tax saving shows up as cash in hand, even though depreciation itself is a non-cash expense. So the net cash impact is a positive cash inflow equal to the depreciation amount multiplied by the tax rate. In this case, that tax shield is a positive amount, which is why the correct choice reflects a cash inflow rather than zero or a cash outflow.