The government is considering a proposal to allow even greater accelerated depre

Question

The government is considering a proposal to allow even greater accelerated depreciation deductions than those specified by MACRS.

a.   For which type of company would the change be more valuable, a company facing a 10% tax rate on one facing a 30% tax rate?

b.   If companies take larger depreciation deductions in the early years of an investment what will be the effect on reported earnings? On cash flow? On project NPVs? How do you think the stock market might respond if the tax law changes to allow greater accelerated depreciation?

Explanation / Answer

a) the company which is in tax slab of 30% is more beneficiary than the one which is in 10% tax bracket

b) the reported earnings can come down, and they can show minimum returns for the sake of tax avaison.

reported earnings come down, but there would not any change in cash flow, means irrespective of depreciation process the real cash flow is same

project NPV can improved

there would not be any change in the prices of stocks with this move

Related Questions

Navigate

• Browse (All)
• Browse T
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.