Dynamic Tax Depreciation Strategies
CentER Discussion Paper Series No. 2008-87
29 Pages Posted: 21 Oct 2008
Date Written: October 13, 2008
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: Suggested Citation