A firm that bases its capital budgeting decisions on either NPV or IRR will be more likely to accept a given project if it uses accelerated depreciation than if it uses straight-line depreciation, other things being equal.

Question

Quizplus · Accepted Answer

This is because accelerated depreciation decreases the taxable income of the firm in the earlier years of the project, resulting in a higher tax shield and a higher cash flow in those earlier years. This higher cash flow will positively affect both NPV and IRR, making the project more attractive and more likely to be accepted.

A Firm That Bases Its Capital Budgeting Decisions on Either