Impacts of Depreciation Method Choice on Capital Budget Analysis
- When analyzing capital projects, companies are incentivized to apply accelerated depreciation methods (refer to Financial Reporting part 1 for more on these methods) because accelerating depreciation generates higher after tax cash flows in the project’s early years.
- As a result of higher early year after-tax cash flows, accelerated depreciation methods typically create higher net present values when compared to the straight line depreciation method.
- Some countries allow the use of special depreciation methodologies solely for tax reporting purposes, but not for financial reporting purposes.
- The U.S. tax code allows companies to use the Modified Accelerated Cost Recovery System (MACRS), which has a specific depreciation schedule for different categories of capital investment.
- An objective of MACRS is to incentivize companies to make investments by reducing their tax burden.
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- CFA Level 2: Corporate Finance Part 1 – Introduction
- Introduction to Capital Structure and Leverage
- Introductory Capital Budgeting Remarks
- Expansion Projects vs. Replacement Projects and Cash Flows
- Impacts of Depreciation Method Choice on Capital Budget Analysis
- Inflation and Capital Budgeting
- Mutually Exclusive Capital Projects with Unequal Lives
- Equivalent Annual Annuity (EAA) Approach
- Least Common Multiple of Lives Approach
- Stand Alone Risk and Capital Projects
- CAPM and a Capital Project’s Discount Rate
- Capital Projects and Real Options
- Common Pitfalls in Capital Budgeting
- Capital Budgeting Alternatives to NPV and IRR Analysis
- Modigliani-Miller and Capital Structure Theory
- Evaluating Capital Structure Policy
- International Differences in Financial Leverage
- Dividend and Share Repurchase Policies
- Factors Affecting Corporate Dividend Policy Decisions
- Signals from Dividend Policies