Phyllis believes that the firm should use straight-line depreciation for a capital project
because it results in higher net income during the early years of the project's life. Joanna
believes that the firm should use the modified accelerated cost recovery system depreciation because it reduces the tax liability during the early years of the projec's life. Assuming you have a choice between depreciation methods, whose advice should you follow? Why?
Depreciation provides a sort of shield against taxes. If there were no taxes, there would be no depreciation tax shields. Does this mean that a project's NPV would be less if there were no taxes?
Straight line depreciation for tax purpose
Accelerated depreciation for tax purposed