If income tax considerations are ignored, depreciation would be excluded from the internal rate of return and payback calculations, because the IRR and the payback period are based upon cash flows. Depreciation would be included in the calculation of the accounting rate of return, because the accounting rate of return is based upon book income, which includes depreciation.
If income tax considerations are to be ignored, then the depreciation tax shield is ignored. Therefore, the income tax savings from the depreciation are not included in the capital budgeting analyses. If the income tax savings from the depreciation are excluded, then depreciation is ignored in the calculations of internal rate of return and payback. However, depreciation is included in the calculation of the accounting rate of return, because the accounting rate of return is based upon book income, which includes depreciation.
If income tax considerations are ignored, depreciation would be excluded from the internal rate of return and payback calculations, because the IRR and the payback period are based upon cash flows.
If income tax considerations are ignored, depreciation would be included in the accounting rate of return calculation, because the accounting rate of return is based upon book income, which includes depreciation. Furthermore, depreciation would be excluded from the payback period calculation, because the payback period calculation is based upon cash flows, not book income.
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