Corp. Finance: Inflation and Capital Budgeting savings, everything, expected, affect, interest

noel

"How would a higher than expected inflation rate affect the value of the real tax savings from depreciation and the value of the real after-tax interest expense, everything else held constant?"

A. real tax savings from depreciation and real interest expense would be lower.
B. real tax savings from depreciation would be higher and real interest expense would be lower.
C. real tax savings from depreciation would be lower and real interest expense would be higher.

I answered A, but I don't know why the answer is B.

ppls

Ya that doesn't look right.

onelife1

A should be the answer, which was verified by my Stalla guide. A reduces the value of the depreciation tax shield. Why? Because you could have bought the same asset at a higher price and recognized greater depreciation expense. I'm not too sure about the interest rate scenario, but the guide states the real interest expense would decrease.

NO EXCUSES

sameeragarwal

please refer to errata

CP