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.
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Acknowledgments
We wish to thank two anonymous reviewers and Dirk Simons for comments that helped to improve the paper significantly.
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Open Access This is an open access article distributed under the terms of the Creative Commons Attribution Noncommercial License (https://creativecommons.org/licenses/by-nc/2.0), which permits any noncommercial use, distribution, and reproduction in any medium, provided the original author(s) and source are credited.
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De Waegenaere, A., Wielhouwer, J.L. Dynamic tax depreciation strategies. OR Spectrum 33, 419–444 (2011). https://doi.org/10.1007/s00291-010-0214-3
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DOI: https://doi.org/10.1007/s00291-010-0214-3