Skip to main content
Sign in Create a free account
Varsity Tutors
Sign in

Cash Flow Timing & Sign Conventions - Corporate Finance

  1. A company is selling a machine at the end of a project's 5-year life. The machine was purchased for $500,000 and depreciated using the straight-line method to a zero book value over 5 years. The company sells the machine for $80,000. If the company's marginal tax rate is 25%, what is the terminal cash flow associated with the sale of this machine?
    Answer: An inflow of $60,000 The terminal cash flow from an asset sale is calculated as the sale price adjusted for taxes on the gain or loss. 1. Calculate Book Value: The machine is depreciated straight-line to zero over 5 years, so its book value at the end of year 5 is $0. 2. Calculate Gain/Loss on Sale: Gain = Sale Price - Book Value = $80,000 - $0 = $80,000. 3. Calculate Taxes on Gain: Taxes = Gain × Tax Rate = $80,000 × 0.25 = $20,000. Since this is a gain, it results in a tax payment (a cash outflow). 4. Calculate After-Tax Cash Flow: Cash Flow = Sale Price - Taxes on Gain = $80,000 - $20,000 = $60,000. This is a net cash inflow to the company. - Distractor A is incorrect. This is the pre-tax salvage value and ignores the tax consequences of the sale. - Distractor C is incorrect. This would be the result if the tax on the gain was incorrectly treated as a cash inflow: $80,000 + $20,000. This is a sign error. - Distractor D is incorrect. This is the amount of the tax payment, not the net cash flow from the sale.
  2. When calculating a project's terminal value using the growing perpetuity formula TVN=CFN+1r−gTV_N = \frac{CF_{N+1}}{r-g}, what is the correct timing convention for discounting this terminal value back to the present?
    Answer: The terminal value TVNTV_N is a value as of time N and should be discounted for N periods. When you encounter terminal value calculations in DCF analysis, you're dealing with a critical timing concept that trips up many students. The growing perpetuity formula TVN=CFN+1r−gTV_N = \frac{CF_{N+1}}{r-g} captures the present value of all cash flows from period N+1 onward, but crucially, it gives you that present value as of time N. Here's the key insight: even though the formula uses CFN+1CF_{N+1} (a cash flow occurring at time N+1), the resulting terminal value TVNTV_N represents the value of the entire perpetual cash flow stream as of time N. Think of it like calculating the present value of a bond's remaining payments - you get a value as of today, not as of when the next coupon payment occurs. Therefore, to bring TVNTV_N back to time 0, you discount it for exactly N periods, making answer D correct. Answer A incorrectly assumes the terminal value is positioned at time N+1 just because the cash flow in the numerator occurs then. Answer B makes no financial sense - there's no such thing as discounting for "average" periods in DCF analysis. Answer C completely misunderstands the formula mechanics; you can't separate the cash flow from the growth component and treat them with different timing conventions. Remember this pattern: in perpetuity formulas, the subscript on TV tells you exactly when that value exists in time. TVNTV_N is always a time-N value, regardless of which period's cash flow appears in the numerator. This timing discipline is essential for accurate DCF modeling.
  3. A company acquires a competitor for $2 million in cash. The acquisition includes $300,000 in cash on the target's balance sheet and $150,000 in existing debt that the acquiring company assumes. The target company also has a pending lawsuit that will likely require a $75,000 settlement payment in 6 months. What is the net cash outflow at the time of acquisition?
    Answer: $1,700,000 The net cash outflow at acquisition is the purchase price of $2,000,000 minus the cash acquired of $300,000, which equals $1,700,000. The assumed debt of $150,000 doesn't affect the cash flow at closing since it's a liability assumption, not a cash payment. The lawsuit settlement is a future cash flow, not part of the acquisition cash flow. Choice A ignores the cash acquired. Choice C incorrectly adjusts for the lawsuit. Choice D incorrectly adjusts for the assumed debt.
  4. A firm is deciding whether to launch a new product. The firm spent $250,000 on market research last year to assess the product's viability. To launch the product now, the firm must invest $1,500,000 in new equipment. The launch is also expected to reduce after-tax profits from one of the company's existing products by $100,000 per year for the 5-year life of the new product. What is the correct cash flow at time 0 (CF₀) for this project's NPV analysis?
    Answer: A $1,500,000 outflow When determining the initial cash flow (CF₀) for a capital budgeting project, we must only include incremental cash flows. - Equipment Investment: The $1,500,000 for new equipment is a necessary, future cash outflow for the project, so it is included as -$1,500,000. - Market Research: The $250,000 spent last year is a sunk cost. It was spent regardless of the current decision to launch or not, so it is excluded from the analysis. - Cannibalization: The reduction in profit of $100,000 per year is a side effect or externality. It is a relevant incremental cash flow, but it occurs in Years 1 through 5, not at time 0. Therefore, the only relevant cash flow at time 0 is the investment in equipment. CF₀ = -$1,500,000. - Distractor A is incorrect. This value, -$1,850,000, incorrectly includes the sunk cost of market research ($1.5M + $250k) and the first year's cannibalization cost ($100k). - Distractor B is incorrect. This value, -$1,750,000, incorrectly includes the sunk cost of market research ($1.5M + $250k). - Distractor D is incorrect. This value, -$1,600,000, incorrectly includes the first year's cannibalization cost as a time 0 cash flow ($1.5M + $100k).
  5. A project generates the following cash flows: Year 0: -$500,000, Year 1: +$200,000, Year 2: +$300,000, Year 3: +$250,000. However, due to environmental regulations, the company must establish a cleanup reserve by setting aside $40,000 at the end of Year 1 and an additional $30,000 at the end of Year 2. These reserves earn no return and are spent on cleanup at the end of Year 3. For NPV analysis purposes, what is the net cash flow in Year 2?
    Answer: $270,000 When analyzing project cash flows, you must account for all cash movements that occur in each period, including any mandatory reserves or regulatory requirements that affect the actual cash available to the company. The project generates $300,000 in Year 2, but you need to subtract the $30,000 that must be set aside for the cleanup reserve at the end of Year 2. This reserve requirement is a real cash outflow that reduces the net cash available from operations. Therefore, the net cash flow for Year 2 is $300,000 - $30,000 = $270,000. Looking at the wrong answers: Choice B ($300,000) represents the gross cash flow before considering the reserve requirement - this ignores a mandatory cash outflow. Choice A ($230,000) incorrectly subtracts both the Year 1 reserve ($40,000) and Year 2 reserve ($30,000) from Year 2's cash flow, but the Year 1 reserve was already accounted for in Year 1. Choice C ($330,000) mistakenly adds the reserve amount to the gross cash flow, perhaps confusing an outflow with an inflow. The key insight is that reserves set aside are real cash outflows in the period they occur, even though the money will eventually be spent in a future period (Year 3 cleanup). For NPV analysis, you track cash flows when they actually occur, not when the underlying economic activity happens. Remember: Always adjust gross project cash flows for any mandatory reserves, regulatory deposits, or similar requirements that occur in each specific year. These represent real cash constraints that affect project value.
  6. A corporation is entering a 5-year lease agreement for new equipment. The lease requires payments of $25,000 to be made at the beginning of each year. The firm's appropriate discount rate for the lease is 8%. Which of the following best represents the sign and magnitude of the liability that should be recorded on the balance sheet at the inception of the lease?
    Answer: A liability of $107,804, representing a cash outflow. The lease payments form an annuity due, as they are made at the beginning of each period. The liability recorded is the present value (PV) of these future payments. The PV of a 5-year annuity due of $25,000 at 8% is calculated as follows: Using a financial calculator, set it to BEGIN mode (for annuity due): N = 5, I/Y = 8, PMT = -25,000, FV = 0. Compute PV = $107,803.55. This represents an obligation, a liability, and its valuation is based on expected future cash outflows. - Distractor A is incorrect. $99,818 is the PV of an ordinary annuity, calculated assuming payments are at the end of each period (calculator in END mode). This is the most common error. - Distractor C is incorrect. While the firm gains a 'right-of-use' asset, the obligation to make payments is a liability. The sign convention for the firm is that the payments are outflows, creating the liability. - Distractor D is incorrect. This value, $92,424, is the PV of an ordinary annuity with N=4. This might be chosen by a student who incorrectly nets out the first payment because it happens at t=0, a misunderstanding of how lease liabilities are calculated.
  7. An investment manager is analyzing a bond purchase decision. The bond costs $1,000 today, pays annual coupons of $60 at the end of each year for 3 years, and returns the principal of $1,000 at maturity. However, the manager plans to sell the bond after receiving the second coupon payment for an estimated price of $1,020. From the investment manager's perspective, what is the cash flow at the end of year 2?
    Answer: $1,080 At the end of year 2, the manager receives both the second coupon payment of $60 and the proceeds from selling the bond for $1,020, totaling $1,080 in cash inflows. Choice A only includes the coupon payment. Choice B only includes the sale proceeds. Choice D incorrectly treats the sale proceeds as negative or subtracts the coupon from the sale price.
  8. A retail company receives a $1,200 cash payment on January 1st for a one-year subscription service. For financial reporting, the company recognizes $100 of revenue each month. For the purpose of a discounted cash flow (DCF) analysis of the company, how should this transaction be timed and signed for the year?
    Answer: As a single cash inflow of $1,200 at the beginning of the year (t=0). Capital budgeting and DCF analysis are based on cash flows, not accounting income. The key principle is to record cash flows when they actually occur. In this scenario, the company receives the entire $1,200 in cash at the beginning of the year. Therefore, the correct representation for a DCF analysis is a single positive cash flow (inflow) of $1,200 at time 0 (or the beginning of Year 1). - Distractor A is incorrect. This approach mistakenly aligns the cash flow timing with the GAAP revenue recognition schedule, which is an accounting convention, not a reflection of cash movement. - Distractor C is incorrect. This delays the recognition of the cash receipt by a full year, which would understate its present value. - Distractor D is incorrect. While the accounting entry involves creating a deferred revenue liability, this does not negate the cash inflow. The change in deferred revenue is a non-cash balance sheet item that reconciles cash flow with net income, but the cash flow itself is the primary input for DCF.
  9. A company is analyzing a project using the Adjusted Present Value (APV) method. The project is financed with $200,000 of debt with an 8% interest rate. The company's tax rate is 25%. The debt will be held constant throughout the project's life. How should the cash flow from the interest tax shield for the first year be represented in the APV calculation?
    Answer: As an inflow of $4,000 discounted at the cost of debt. In the APV method, the value of a project is the sum of its value as if it were all-equity financed, plus the present value of the financing side effects, such as the interest tax shield. The interest tax shield for a given year is the amount of tax savings due to the deductibility of interest expense. 1. Interest Expense: Debt × Interest Rate = $200,000 × 8% = $16,000. 2. Tax Shield: Interest Expense × Tax Rate = $16,000 × 25% = $4,000. This tax saving is a positive cash flow to the firm. In the APV method, this cash flow is explicitly calculated and then discounted. Assuming the debt is relatively risk-free, the tax shields are typically discounted at the cost of debt. - Distractor A is incorrect. This misidentifies the tax shield as an outflow and uses the pre-tax interest amount. - Distractor C is incorrect. It calculates the after-tax interest payment ($16,000 * (1-0.25) = $12,000), which is not the tax shield. The discount rate could be the unlevered cost of equity under certain assumptions, but the cash flow amount is wrong. - Distractor D is incorrect. This describes how the tax shield is treated in the WACC method, not the APV method.
  10. A project's cash flows are represented on a timeline. The entry at time t=4 is a single positive value. Which of the following financial events could this entry not represent?
    Answer: An additional required investment in project machinery. On a standard cash flow timeline from the firm's perspective, positive values represent cash inflows, and negative values represent cash outflows. - A: The sale of equipment brings cash into the firm, so it is a positive cash flow (inflow). - B: Operating cash flow is typically positive (an inflow), representing cash generated by the project's operations. - C: The recovery of NWC at the end of a project is a return of capital, representing a cash inflow. - D: An investment in machinery requires the firm to spend cash, which is a cash outflow. This would be represented by a negative value on the timeline. Therefore, a single positive value could not represent this event. This question tests the fundamental understanding of sign conventions.
  11. A project requires an initial investment of $800,000 and generates annual after-tax cash flows of $180,000 for 5 years. The project also requires replacement of a component costing $120,000 at the end of year 3 (this replacement extends the project life as planned). Additionally, the project increases net working capital by $50,000 at the beginning and this working capital is recovered at the end. What is the net cash flow at the end of year 3?
    Answer: $60,000 When analyzing project cash flows, you need to carefully track each component that affects cash in a specific year, not just the regular operating flows. Year-end cash flows can include multiple elements beyond the standard annual cash flow. For year 3, you start with the regular after-tax cash flow of $180,000. However, the project also requires a $120,000 component replacement at the end of year 3. This is a cash outflow that reduces the net cash flow for that year. Therefore, the net cash flow at the end of year 3 is: 180,000−120,000=60,000180,000 - 120,000 = 60,000 Looking at the wrong answers: Choice A ($300,000) incorrectly adds the component cost to the annual cash flow instead of subtracting it, treating the replacement as a cash inflow rather than outflow. Choice B ($180,000) only considers the regular annual cash flow and completely ignores the component replacement cost. Choice D ($230,000) makes a calculation error, possibly adding only part of the replacement cost or confusing it with another project element. Note that the working capital changes don't affect year 3 – the initial $50,000 increase occurs at the beginning of the project, and the recovery happens at the end of year 5 when the project terminates. Study tip: Always create a year-by-year cash flow timeline for complex projects. List all cash flows (positive and negative) that occur in each period, including irregular items like equipment replacements, working capital changes, and salvage values. This prevents you from missing components or incorrectly timing cash flows.
  12. A project requires an initial investment of $200,000. It is expected to generate the following after-tax cash flows: Year 1: $60,000; Year 2: $80,000; Year 3: $90,000; Year 4: $100,000. What is the project's payback period?
    Answer: 2.67 years The payback period is the time it takes for the cumulative cash inflows to equal the initial investment. We do not discount the cash flows for the simple payback period. Initial Investment: $200,000 - After Year 1: Cumulative cash flow = $60,000. Amount remaining to be recovered: $200,000 - $60,000 = $140,000. - After Year 2: Cumulative cash flow = $60,000 + $80,000 = $140,000. Amount remaining to be recovered: $140,000 - $80,000 = $60,000. - During Year 3: The project will generate $90,000. We only need to recover $60,000 more. The fraction of Year 3 needed is: (Amount remaining) / (Cash flow in Year 3) = $60,000 / $90,000 = 2/3 or 0.67 years. Total Payback Period = 2 years + 0.67 years = 2.67 years. - Distractor B is incorrect. This would be the answer if the student incorrectly determines that the full third year is needed, without calculating the fraction of the year. - Distractor C is incorrect. This results from an incorrect calculation of the fraction, perhaps by inverting it ($90,000 / $60,000) or another arithmetic error. - Distractor D is incorrect. This may arise from a simple miscalculation of the fraction.
  13. A company is evaluating a project that requires an initial investment of $500,000 at time 0. The project will generate operating cash flows of $150,000 at the end of each year for 4 years. At the end of year 2, the company must invest an additional $75,000 in working capital, which will be fully recovered at the end of year 4. Using the company's perspective and standard NPV sign conventions, what is the net cash flow at the end of year 4?
    Answer: $225,000 At the end of year 4, the company receives the operating cash flow of $150,000 (positive) plus the recovery of working capital of $75,000 (positive), for a total net cash flow of $225,000. Both are inflows from the company's perspective. Choice B ignores the working capital recovery. Choice C only includes the working capital recovery. Choice D incorrectly doubles the operating cash flow.
  14. An analyst is valuing a project with annual cash flows but is given a discount rate of 12% compounded quarterly. Which of the following cash flow streams correctly represents the time-zero valuation of the project's first two annual cash flows, CF₁ and CF₂?
    Answer: PV=CF1(1+0.12/4)4+CF2(1+0.12/4)8PV = \frac{CF₁}{(1 + 0.12/4)⁴} + \frac{CF₂}{(1 + 0.12/4)⁸} When cash flows are annual, they must be discounted by an appropriate annual rate. The given rate of 12% compounded quarterly is a nominal rate (APR). It must be converted to an Effective Annual Rate (EAR) to discount annual cash flows. The EAR is calculated as EAR=(1+APRm)M−1=(1+0.124)4−1=(1.03)4−1≈12.55EAR = (1 + \frac{APR}{m})ᴹ - 1 = (1 + \frac{0.12}{4})⁴ - 1 = (1.03)⁴ - 1 \approx 12.55%. The correct PV formula would be PV=CF1(1.1255)+CF2(1.1255)2PV = \frac{CF₁}{(1.1255)} + \frac{CF₂}{(1.1255)²}. However, let's examine the choices. Choice A discounts the first annual cash flow by (1.03)4(1.03)⁴ and the second by (1.03)8(1.03)⁸. This is mathematically equivalent to discounting by the EAR for 1 and 2 years, respectively. PV=CF1(1.03)4+CF2((1.03)4)2=CF11.1255+CF2(1.1255)2PV = \frac{CF₁}{(1.03)⁴} + \frac{CF₂}{((1.03)⁴)²} = \frac{CF₁}{1.1255} + \frac{CF₂}{(1.1255)²}. Therefore, choice A is the correct representation. - Distractor B is incorrect. It uses the 12% nominal rate as if it were an effective annual rate, ignoring the quarterly compounding. - Distractor C is incorrect. It uses the quarterly rate (3%) but discounts the annual cash flows as if they were quarterly cash flows, which misrepresents the timing. - Distractor D is incorrect. It incorrectly treats the annual cash flows as if they occurred after one quarter and two quarters, rather than one and two years.
  15. A firm is evaluating a project where it will use a warehouse it already owns. The warehouse could otherwise be rented out for $100,000 per year, with rent received at the end of each year. The firm's tax rate is 30%, and the project has a 3-year life. How should this opportunity be reflected in the project's cash flow analysis for Year 1?
    Answer: As a cash outflow of $70,000, representing the foregone after-tax rental income. The foregone rent is an opportunity cost of taking on the project. This cost must be included in the capital budgeting analysis. Since the project's cash flows are analyzed on an after-tax basis, the opportunity cost must also be after-tax. The foregone cash inflow from rent is $100,000. If this rent had been received, the company would have paid taxes on it. The after-tax opportunity cost is the rental income that is given up, net of the taxes that would have been paid on it. After-tax opportunity cost = Pre-tax rent × (1 - Tax Rate) = $100,000 × (1 - 0.30) = $70,000. Since the company is giving up this potential inflow, it is treated as a cash outflow for the project. Thus, it is a cash outflow of $70,000 for each year of the project. - Distractor A is incorrect. It correctly calculates the after-tax amount but assigns the wrong sign. It is a cost (outflow), not a benefit (inflow). - Distractor B is incorrect. It uses the pre-tax amount of the opportunity cost, failing to account for the tax shield that the rental income would have provided. - Distractor D is incorrect. This reflects a misunderstanding of opportunity costs. Even if no explicit payment is made, there is a real economic cost to using the asset.
  16. A retail chain is opening a new store. The project requires $400,000 for store fixtures, $100,000 for initial inventory, and $25,000 for pre-opening marketing. The initial inventory is expected to turn over completely and be replaced with $120,000 of inventory by the end of the first month. From a cash flow timing perspective, what amount should be treated as the initial investment at time 0?
    Answer: $525,000 When evaluating capital budgeting projects, you need to identify all cash flows that occur at time 0 (the initial investment) versus those that happen during the project's operating period. The key principle is that initial investment includes all upfront costs required to get the project operational, regardless of when those costs might be recovered or replaced. For this retail store project, let's identify each component. The $400,000 for store fixtures is clearly an initial capital expenditure at time 0. The $25,000 for pre-opening marketing is also an upfront cost that must be spent before the store opens. The initial inventory of $100,000 represents working capital that must be invested before operations begin. The fact that inventory turns over and gets replaced with $120,000 of new inventory by month-end doesn't change the initial investment calculation. You still need that first $100,000 to stock the store before it opens. The inventory replacement is an operating cash flow that occurs during the project, not part of the initial investment. Therefore, the initial investment is: $400,000 + $100,000 + $25,000 = $525,000. Answer A ($545,000) incorrectly includes both the initial inventory and some portion of the replacement inventory. Answer B ($500,000) omits the pre-opening marketing costs. Answer C ($425,000) omits the initial inventory entirely, perhaps confusing it with operating cash flows. Remember: Initial investment captures what you must spend upfront to launch the project. Don't let information about future operating activities distract you from identifying true time-0 cash flows.
  17. A technology company is licensing software from a vendor. The license agreement requires an upfront payment of $150,000, annual maintenance fees of $30,000 paid at the beginning of each year for 3 years, and a $20,000 implementation fee paid 30 days after contract signing. The company's fiscal year ends December 31, and the contract is signed on December 1. What is the total cash outflow in the first fiscal year?
    Answer: $200,000 In the first fiscal year (ending December 31): upfront payment $150,000 (paid December 1), first year's maintenance fee $30,000 (paid at the beginning, which is December 1), and implementation fee $20,000 (paid 30 days after December 1, which is still within the first fiscal year). Total = $150,000 + $30,000 + $20,000 = $200,000. Choice B omits the implementation fee. Choice C omits the maintenance fee. Choice D only includes the upfront payment.
  18. An oil company is evaluating a drilling project. The project requires $3 million upfront for equipment and $500,000 for environmental permits. Oil production begins immediately and generates $1.2 million annually for 3 years. However, environmental regulations require the company to post a $200,000 reclamation bond at the start (refunded after successful cleanup) and spend $300,000 on site restoration at the end of Year 3. What is the net cash flow at the end of Year 3?
    Answer: $1,100,000 At the end of Year 3: oil production generates +$1,200,000, site restoration costs -$300,000, and the reclamation bond is refunded +$200,000. Net cash flow = $1,200,000 - $300,000 + $200,000 = $1,100,000. Choice A omits the bond refund. Choice C ignores the restoration cost. Choice D incorrectly adds the restoration cost instead of subtracting it.
  19. An analyst is evaluating two mutually exclusive projects, Project A and Project B, with different lifespans. Project A has a 3-year life and an NPV of $50,000. Project B has a 6-year life and an NPV of $70,000. To make a valid comparison, the analyst calculates the Equivalent Annual Annuity (EAA). This calculation requires treating the NPV as a specific type of cash flow. How is the NPV treated in the EAA calculation?
    Answer: As a present value (PV) to be annuitized over the project's life. When you encounter mutually exclusive projects with different lifespans, you need the Equivalent Annual Annuity (EAA) method to make a fair comparison. The EAA converts each project's total value into an equivalent annual payment, allowing you to compare projects on an annual basis. In the EAA calculation, you treat the NPV as a present value (PV) that gets converted into an annuity stream. Think of it this way: the NPV represents the total present value of all future benefits from the project. To find the EAA, you solve for what annual payment (PMT) would have the same present value as the NPV over the project's life. Using the formula: EAA=NPV×r(1+r)n(1+r)n−1EAA = NPV \times \frac{r(1+r)^n}{(1+r)^n-1}, where the NPV serves as the PV input. Option A incorrectly treats NPV as a future value, but NPV is already expressed in present value terms. Option B misunderstands the calculation entirely—the EAA isn't simply the average annual cash flow, but rather the annualized equivalent of the total NPV. Option C creates a confused framework where NPV becomes a cash outflow, when NPV already represents the net benefit after accounting for all inflows and outflows. The correct answer is D because the NPV functions as the present value that you're annuitizing over the project's life to find the equivalent annual payment. Study tip: Remember that EAA problems always start with NPV as your present value input. When you see different project lifespans, think "annuitize the NPV" to enable fair comparison.
  20. A firm is analyzing a project with a 4-year life. The firm uses straight-line depreciation. An accountant provides a schedule showing Net Income for the project as $20k, $25k, $30k, and $35k for years 1-4 respectively. To convert this to Operating Cash Flow (OCF), an analyst must adjust for depreciation. If the initial asset cost was $80k with zero salvage value, how does the Year 2 OCF relate to the Year 2 Net Income?
    Answer: OCF is $20,000 greater than Net Income. Operating Cash Flow (OCF) can be calculated from Net Income by adding back any non-cash charges that were deducted to arrive at Net Income. Depreciation is the most common non-cash charge. 1. Calculate Annual Depreciation: The asset cost is $80k and it is depreciated straight-line over 4 years. Annual Depreciation = $80,000 / 4 = $20,000. 2. Calculate OCF from Net Income: The formula is OCF = Net Income + Depreciation. (This assumes no other non-cash items like amortization). 3. Apply to Year 2: OCF₂ = Net Income₂ + Depreciation₂ = $25,000 + $20,000 = $45,000. Therefore, the OCF in Year 2 is $20,000 greater than the Net Income for that year. The key is to recognize that depreciation is a non-cash expense that must be added back to accounting profit to find the cash flow. - Distractor B is incorrect. This would happen if the analyst mistakenly adds back the Net Income amount itself instead of the depreciation amount. - Distractor C is incorrect. This shows a misunderstanding of the adjustment, perhaps subtracting a value instead of adding it back. - Distractor D is incorrect. While depreciation is an operating expense for accounting purposes, it is a non-cash expense and must be added back to determine cash flow.

Start this quiz