The Impact of Bonus Depreciation on Project Decision Making

Abstract

This paper develops an Excel model – useful to students, academics, and business professionals - that values the impact of government driven increases in temporary first-year depreciation allowances, known as bonus depreciation. Bonus depreciation is a temporary measure that has been used as a tool to stimulate economic activity by directly affecting the profitability and payback of a project and thereby impacting the investment decision of managers. We develop an evaluation technique, using net present value (NPV), that integrates the effects of bonus depreciation in a flexible model that can be used to determine the ultimate change on a project's base NPV.

Keywords: bonus depreciation, simulation, Excel

JEL Classification: A22, A23, G30, G31