Question

1. I read that the GOP new tax plan (March 2017) is considering allowing firms to depreciate the entire capital expenditures in the year the outlay occurred.
2. How would this change affect the PV of an investment’s after-tax operating profit?
3. How would this change affect the PV of an investment’s after-tax cash flows?
4. How would this change affect an investment’s expected NPV?

Answer 1

If the firms are allowed to depreciate the entire capital expenditures in the year the outlay occurred.

1. Change in PV of after-tax operating profit. :

Here the entire capital expenditure is depreciated as a result the firms will report a heavy loss in the first year and after years they will report more profit this will result in more tax deduction in after years also the present value of depreciation will be more if it is deducted upfront as a result PV of an investment's after-tax operating profit will decrease.

2. Investment after-tax cash flow

Here the entire depreciation will be expensed as soon as outlay occurs, as a result, it will be outflow to the firms in the very initial year also the tax will be deducted more in later years hence the PV of an investment after-tax cash flow will decrease.

3. Expected NPV

Here the NPV of the investment will not change as in real the capital is expensed in the beginning only the recognization of the depreciation happens at a later stage as a result NPV of the investment will not change.