The capital budgeting manager for XYZ Corporation,a very profitable high technology company,completed her analysis of Project A assuming 5-year depreciation.Her accountant reviews the analysis and changes the depreciation method to 3-year depreciation.This change will
A) increase the present value of the NCFs.
B) decrease the present value of the NCFs.
C) have no effect on the NCFs because depreciation is a non-cash expense.
D) only change the NCFs if the useful life of the depreciable asset is greater than 5 years.

Question

Quizplus · Accepted Answer

Changing the depreciation method to a shorter period (from 5-year to 3-year depreciation) increases the depreciation expense in the earlier years. This results in lower taxable income early on and thus higher tax savings, which increases the present value of the net cash flows (NCFs) due to the time value of money.

The Capital Budgeting Manager for XYZ Corporation,a Very Profitable High