The depreciation method used in capital budgeting is irrelevant because any depreciation not taken during the useful life of the project will add to the book value when assets are sold.

Question

Quizplus · Accepted Answer

The depreciation method used in capital budgeting is relevant in determining the cash flows generated by the project, which is important in evaluating its profitability. The total depreciation expense over the useful life of the assets is subtracted from the revenues to determine the taxable income, which in turn determines the net cash inflow from taxes. This net cash inflow is then added to the operating cash flows to determine the total cash flows generated by the project. The book value of the assets when they are sold is irrelevant in this calculation.

The Depreciation Method Used in Capital Budgeting Is Irrelevant Because