A firm has earnings of $12,000 before interest, depreciation, and taxes. A new piece of equipment is installed at a cost of $10,000. The equipment will be depreciated over five years, and the firm pays 25 percent of its earnings in taxes. What are the earnings and cash flows for the firm in years 2 and 5, using the two methods of depreciation discussed in the chapter? What is the source of the difference in earnings and cash flow?
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