If depreciation expense is taken over 5 years rather than 3 years, all things equal,
A) net present value will go down.
B) depreciation has no effect on net present value.
C) net present value will go up.
D) the answer depends on the company's marginal tax rate.

Question

Quizplus · Accepted Answer

Depreciation expense represents a tax shield, and therefore a longer depreciation schedule means less depreciation expense each year, yielding less tax savings. This results in a lower present value of the tax savings and a lower net present value.

If Depreciation Expense Is Taken Over 5 Years Rather Than