The capital budgeting manager for XYZ Corporation, a very profitable high techno

Question

The capital budgeting manager for XYZ Corporation, a very profitable high technology company, completed her analysis of Project A assuming 5 year depreciation. He accountant reviews the analysis and change the depreciation method to 3 year depreciation. This change will, ________

A) Increase the present value of the net cash flow
B) Decrease the present value of the net cash flow
C) Have no effect on the net cash flow because depreciation is a non cash expense
D) Only change the net cash flows if the useful life of the depreciable asset is greater than five years.

Explanation / Answer

Depreciation is a non cash charge, but has a cash flow effect because it reduces taxable income. Therefore 3 year depreciation should increase the present value (a).

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