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Decided not to replace the depreciated equipment
Course:- Financial Management
Reference No.:- EM131016081




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Two identical firms, A and B, have the same revenue of $10 million and equal variable and fixed costs for the current year. At the start of the year, they both owned $20,000,000 in equipment which follows a depreciation schedule of 5% per year.   Over the year A decided not to replace the depreciated equipment, while B did. They otherwise acted equivalently. Which of the following is a correct implication?

A’s interest coverage ratio over the year exceeded B’s.

B’s interest coverage ratio over the year exceeded A’s.

B paid less tax than A

B will have less cash than A at year’s end




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