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Depreciation Methods for a New Capital Project

A. 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 project's life. Assuming you have a choice between depreciation methods, whose advice should you follow? Why?

B. 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?

C. The total present value of all costs associated with an asset over a seven-year life is $73,285. If the asset has a cost of capital of 11%, what is the EAC of using this asset?

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Answers:

Question A:
In capital project decisions, the decision factor is always the net present value of the projects which are based on ...

Solution Summary

This solution discusses using NPV for making capital project decisions in 130 words with calculations for equivalent annual cost.

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