Which of the following statements best describes CCA?
A) Using CCA method rather than straight-line depreciation would normally have no effect on a project's total projected cash flows but it would affect the timing of the cash flows and thus the NPV.
B) Corporations must use the same depreciation method (e.g., straight-line or CCA) for stockholder reporting and tax purposes.
C) Since CCA deduction is not a cash expense, it has no affect on cash flows and thus no affect on capital budgeting decisions.
D) Under CCA rules, higher CCA deductions occur in the early years, and this reduces the early cash flows and thus lowers a project's projected NPV.

Question

Quizplus · Accepted Answer

CCA (capital cost allowance) is a method of depreciation used for tax purposes in Canada. It allows for accelerated depreciation in the early years, which affects the timing of cash flows and ultimately the NPV of a project. However, it does not affect the total projected cash flows. Choice B is incorrect because corporations can use different depreciation methods for financial reporting and tax purposes. Choice C is incorrect because CCA deductions do have an impact on taxes and thus can affect cash flows. Choice D is partially correct in that higher CCA deductions do occur in the early years, but this actually increases cash flows in those years, although it may reduce them in later years.

Which of the Following Statements Best Describes CCA