Dynamic Tax Depreciation Strategies

CentER Discussion Paper Series No. 2008-87

29 Pages Posted: 21 Oct 2008

See all articles by Anja De Waegenaere

Anja De Waegenaere

Tilburg University - Department of Econometrics & OR, Netspar, and CentER

J. Wielhouwer

VU University Amsterdam

Date Written: October 13, 2008

Abstract

The tax depreciation decision potentially has significant impact on the profitability of firms and projects. Indeed, the depreciation method chosen for tax purposes affects the timing of tax payments, and, as a consequence, it also affects the after-tax net present value of investment projects. Previous research focusses on the optimal choice of depreciation method under the assumption that the depreciation method has to be set ex ante and cannot be changed during the useful life of the asset. In reality however, changes are allowed under certain circumstances. This paper develops a dynamic programming approach to determine the firm's optimal choice with regard to the initial depreciation method, and whether changes of method are proposed in later periods.

Keywords: Tax depreciation, net present value, dynamic programming

JEL Classification: C61, M41, G31, H25

Suggested Citation

De Waegenaere, Anja M.B. and Wielhouwer, Jacco L., Dynamic Tax Depreciation Strategies (October 13, 2008). CentER Discussion Paper Series No. 2008-87. Available at SSRN: https://ssrn.com/abstract=1287583 or http://dx.doi.org/10.2139/ssrn.1287583

Anja M.B. De Waegenaere (Contact Author)

Tilburg University - Department of Econometrics & OR, Netspar, and CentER ( email )

P.O. Box 90153
Tilburg, 5000 LE
Netherlands

Jacco L. Wielhouwer

VU University Amsterdam ( email )

De Boelelaan 1105
Amsterdam, 1081HV
Netherlands

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