Suppose a firm’s tax rate is 25%.

a. What effect would a $10 million operating expense have on this year’s earnings? What effect would it have on next year’s earnings?

b. What effect would a $10 million capital expense have on this year’s earnings if the capital is depreciated at a rate of $2 million per year for five years? What effect would it have on next year’s earnings?

AppendixLO1