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

Question

Quizplus · Accepted Answer

This is because immediately expensing depreciation will result in higher cash flows in the early years of the project's life, which will increase the project's NPV and IRR. Using straight-line depreciation would spread the tax benefits over the life of the asset and result in lower cash flows in the early years, which would reduce the project's NPV and IRR.

A Firm That Bases Its Capital Budgeting Decisions on Either