Dynamic Tax Depreciation Strategies

A.M.B. De Waegenaere, J.L. Wielhouwer

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Abstract

The tax depreciation decision potentially has significant impact on the prof- itability 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 de- preciation 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 circum- stances. 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.
Original languageEnglish
Place of PublicationTilburg
PublisherAccounting
Number of pages29
Volume2008-87
Publication statusPublished - 2008

Publication series

NameCentER Discussion Paper
Volume2008-87

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Keywords

  • Tax depreciation
  • Net Present Value
  • Dynamic Programming

Cite this

De Waegenaere, A. M. B., & Wielhouwer, J. L. (2008). Dynamic Tax Depreciation Strategies. (CentER Discussion Paper; Vol. 2008-87). Accounting.