Suppose the tax law changes to allow firms to immediately and fully deduct the cost of investments they make rather than depreciating them under the MACRS system.If all else remains the same,this change would tend to increase the NPV of an investment project.

Question

Quizplus · Accepted Answer

Allowing firms to immediately and fully deduct the cost of investments they make would increase the cash flows in the earlier years of the project, thus increasing the NPV of the investment project. This is because the tax savings from the immediate deduction would result in lower taxes in the early years of the project, which would increase the after-tax cash flows and, hence, increase the NPV.

Suppose the Tax Law Changes to Allow Firms to Immediately