explain this statement.
In calculating net income, depreciation is a deduction. Therefore, as depre-
ciation expense increases in the coming years, net income will decrease.
Specifically, net income will be reduced by (Depreciation expense) × (1 –
Tax rate). In calculating CFO, however, depreciation is added back in full
to net income. The difference between depreciation expense—the amount
added back to net income to calculate CFO—and the amount by which net
income is reduced by depreciation expense is (Tax rate) × (Depreciation
expense)[why not 1-t this time], which represents a positive increment to CFO.
That’s because the Q is about the difference between the amount by which the net income ↓ due to depreciation & the amount i.e., added back while computing CFO. The difference is tax wala amount, how?
Look, when you expense depreciation your NI falls by Dep^n × (1-tax rate) & while you add back for computing CFO you add the entire amount so dono ke bich m the difference is off tax amount.
I hope now you’re clear as to why Depreciation × tax rate. Thank you!