What affects project’s projected NPV

Which of the following statements is CORRECT?

Answer

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.

Under current laws and regulations, corporations must use straight-line depreciation for all assets whose lives are 5 years or longer.

Corporations must use the same depreciation method (e.g., straight line or accelerated) for stockholder reporting and tax purposes.

Since depreciation is not a cash expense, it has no effect on cash flows and thus no effect on capital budgeting decisions.

 

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.