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The net present value will increase. Since MACRS is an accelerated depreciation method used in calculating income tax liability, its use will result in lower tax liability during the early years of the asset's life than if the depreciation is calculated using the straight-line method. The decreased income tax liability will result in higher cash inflows during the early years of the project. The higher cash inflows during the early years of the project will result in a higher present value of the cash inflows for the project. The net present value of a project is the expected monetary gain or loss from the project calculated by discounting all expected future cash inflows and outflows to the present point in time, using the required rate of return. Therefore, a higher present value for the cash inflows will result in a higher net present value for the project.
The profitability index will increase. Since MACRS is an accelerated depreciation method used in calculating income tax liability, its use will result in lower tax liability during the early years of the asset's life than if the depreciation is calculated using the straight-line method. The decreased income tax liability will result in higher cash inflows during the early years of the project. The higher cash inflows during the early years of the project will result in a higher present value of the cash inflows for the project. Since the profitability index is the present value of the future net cash flows divided by the initial investment, the higher present value for the cash inflows will result in a higher profitability index.
The internal rate of return will increase. Since MACRS is an accelerated depreciation method used in calculating income tax liability, its use will result in lower tax liability during the early years of the asset's life than if the depreciation is calculated using the straight-line method. The decreased income tax liability will result in higher cash inflows during the early years of the project. The higher cash inflows during the early years of the project will result in a higher present value of the cash inflows for the project. Since the internal rate of return is the discount rate at which the net present value of the project is zero, the higher present value of the cash inflows for the project will increase the internal rate of return.
The payback period will be shortened. Since MACRS is an accelerated depreciation method used in calculating income tax liability, its use will result in lower tax liability during the early years of the asset's life than if the depreciation is calculated using the straight-line method. The decreased income tax liability will result in higher cash inflows during the early years of the project. The higher cash inflows during the early years of the project will result in a shorter payback period.