The present value at any given discount rate of the depreciation tax shield is:
A)Equal for all depreciation methods
B)Higher with MACRS than straight-line depreciation
C)Higher for the tenth year than the seven-year recovery period class
D)Likely to increase annually due to inflation

Question

Quizplus · Accepted Answer

MACRS depreciation results in higher depreciation tax shields than straight-line depreciation, therefore its present value is also higher at any given discount rate. Option A is incorrect as different depreciation methods can result in different depreciation tax shields. Option C is incorrect as the length of the recovery period does not necessarily determine the present value of the depreciation tax shield. Option D is incorrect as inflation does not necessarily increase the present value of the depreciation tax shield.

The Present Value at Any Given Discount Rate of the Depreciation