Dynamic tax depreciation strategies

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

Research output: Contribution to journalArticleScientificpeer-review

2 Citations (Scopus)
283 Downloads (Pure)

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. However, several countries allow changes of depreciation method 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.
Original languageEnglish
Pages (from-to)419-444
JournalOR Spectrum
Volume33
Issue number2
DOIs
Publication statusPublished - 2011

Keywords

  • tax depreciation
  • net present value
  • dynamic programming

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