Question

Why is accelerated depreciation (MACRs) useful for a firm?

		Since depreciation is not a cash flow, it is not useful, merely required by the tax code
		Accelerating the depreciation reduces book value; increasing book-value based return ratios
		MACRs is consistently applied in other countries
		MACRS reduces taxes and increases cash flow

Answer 1

Correct answer: MACRS reduces taxes and increases cash flow

MACRS (depreciation) is a non cash expenditure to firm but it is deductible expenditure for taxation. It reduces the taxable income of firm and thus reduces the tax payment which increases the cash flow of firm.

Tax benefits of MACRS (depreciation) is also called tax shield of depreciation.