The manager of Firm Z, a new business that anticipates a steady growth in profits over the next decade, must decide between the cash method and the accrual method as the overall method for tax purposes. She understands that the difference between the two methods is essentially one of timing and that, over the life of the firm, either method should result in the same taxable income. What she doesn’t understand is why the cash method might improve the NPV of the firm’s cash flows over the next decade. Can you provide an explanation?
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