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I came across a question in first year's finance book.The question is:

For a tax-paying firm, an increase in ______will cause the cash flow from assets to increase.

A. Change in net working capital B. Production costs C. Depreciation D. Taxes E. Net capital spending

C is the right answer, however I am not clear why depreciation increase the cash flow. Thanks for your help.

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  • $\begingroup$ Please clarify what "cash-flow from assets" means /how is defined. $\endgroup$ Sep 5, 2015 at 18:02

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Depreciation is tax-deductible. The firm in question pays taxes. If depreciation increases, then taxes paid decrease. If taxes paid decrease, then cash flow increases. ceteris paribus

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