The present value of the depreciation tax shield at any given discount rate is:
A) equal for all depreciation methods.
B) higher with MACRS than with straight-line depreciation.
C) higher for the 7-year recovery period than for the 5-year recovery period class.
D) likely to increase annually due to inflation.

Question

Quizplus · Accepted Answer

MACRS depreciation method generally results in higher depreciation expense during the earlier years compared to straight-line depreciation, resulting in a higher present value of the depreciation tax shield. Option A is incorrect because the present value of the depreciation tax shield may vary depending on the depreciation method used. Option C is incorrect because the length of the recovery period does not necessarily determine the present value of the depreciation tax shield. Option D is incorrect because inflation may affect the value of the depreciation tax shield, but it does not necessarily increase it annually.

The Present Value of the Depreciation Tax Shield at Any