Question

Which of the following statements is true?a. Using accelerated depreciation rather than straight line would normally have no effect on a project's total projected cash flows but it would affect the timing of the cash flows and thus the NPV.b. Under current laws and regulations, corporations must use straight-line depreciation for all assets whose lives are 5 years or longer.c. Corporations must use the same depreciation method (e.g., straight line or accelerated) for stockholder reporting and tax purposes.d. Since depreciation is not a cash expense, it has no effect on cash flows and thus no effect on capital budgeting decisions.e. Under accelerated depreciation, higher depreciation charges occur in the early years, and this reduces the early cash flows and thus lowers a project's projected NPV.

Answer 1

Answer:

The correct answer is letter "A": Using accelerated depreciation rather than straight line would normally have no effect on a project's total projected cash flows but it would affect the timing of the cash flows and thus the NPV.

Explanation:

Accelerated depreciation is a form of accounting and taxation used in the first years of an asset to allow greater deductions. On the other hand, the deductions are distributed evenly throughout the life of the asset using the Straight-line Depreciation method. Accelerated depreciation facilitates higher expenses to be incurred during the first years of an asset while in use, and lower expenses years later, as long as the asset depreciates.

In that sense, when it comes to the total projected cash flow of a company on a project, neither the accelerated depreciation or the straight-line method would affect it but both of them have impact on the timing of the cash flows since accelerated depreciation demands higher expenses since the beginning of the possession of the assets while the straight-line method keeps the expenses steady. Both, also affect the net present value (NPV) of the company since with the accelerated depreciation the cash flow will be less and with the straight-line method it should be constant.