Cash outflows at the initial point of the project are not affected by the method used to depreciate it later.
The use of an accelerated method of depreciation in computing the net present value of a project does not lower the net present value of the project. It has the opposite effect.
The use of an accelerated method of depreciation in computing the net present value of a project has no effect on the hurdle rate. The hurdle rate, or the required rate of return, to be used to calculate the net present value of a capital budgeting project is determined by management. It is usually based on the company's cost of capital and is adjusted to reflect the amount of risk perceived by management.
The depreciation tax shield is the amount by which the tax payment owed by the company will be reduced as a result of the tax deductibility of the depreciation. This reduction of the tax payable is essentially a cash inflow for the company. The use of an accelerated method of depreciation for tax purposes will result in higher depreciation in the early years of a project and lower depreciation in the later years, when compared with straight-line depreciation. Higher cash flow in the early years of a project has a greater present value than higher cash flow in the later years. Thus, accelerated depreciation for tax purposes will increase the present value of the depreciation tax shield.
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