Consider the following statements about depreciation tax shields:
I. A depreciation tax shield provides distinct benefits to a business.
II. A depreciation tax shield should be ignored when doing a net-present-value analysis.
III. A depreciation tax shield can occur in more than one year.
Which of the above statements is (are) correct?

Question

Quizplus · Accepted Answer

I. A depreciation tax shield does provide distinct benefits to a business by reducing taxable income, which in turn reduces the taxes payable. III. A depreciation tax shield can indeed occur over multiple years as assets are depreciated over their useful lives, not just in a single year. II is incorrect because depreciation tax shields should not be ignored in net-present-value analysis; they are an important factor in determining the after-tax cash flows of a project.

Consider the Following Statements About Depreciation Tax Shields