The capital budgeting manager for XYZ Corporation, a very profitable high technology company, completed her analysis...
The capital budgeting manager for XYZ Corporation, a very profitable high technology company, completed her analysis of Project A assuming 5-year depreciation. Her accountant reviews the analysis and changes the depreciation method to 3-year depreciation. This change will
A. increase the present value of the NCFs.
B. decrease the present value of the NCFs.
C. have no effect on the NCFs because depreciation is a non-cash expense.
D. only change the NCFs if the useful life of the depreciable asset is greater than 5 years.
Homework Answers
Ans A. increase the present value of the NCFs.
The capital budgeting manager for XYZ Corporation, a very profitable high technology company, completed her analysis of Project A assuming 5-year depreciation. Her accountant reviews the analysis and changes the depreciation method to 3-year depreciation. This change will increase the present value of the NCFs. Decrease in depreciation life will result in higher depreciation being charged in the initial years. This will help in saving taxes in the initial years resulting in higher Net present value of cash flows in the initial as well as overall period.
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