Which of the following statements best describes CCA?
A)Using CCA 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 is not a cash expense, it has no effect on cash flows and thus no effect 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 tax depreciation method that allows for accelerated deductions in the early years and slower deductions in later years. This affects the timing of the tax shield and can impact a project's NPV (net present value) calculation. However, it does not affect the total projected cash flows of a project. Therefore, statement A is the most accurate description of CCA. Statements B and C are incorrect, as corporations can choose different depreciation methods for stockholder reporting and tax purposes, and CCA does have an effect on cash flows. Statement D is partially correct, as higher CCA deductions do occur in the early years, but the reduced cash flows may not necessarily lower a project's NPV, as it depends on the specific project's cash flow pattern and discount rate.

Which of the Following Statements Best Describes CCA