Problem:
The government is considering a proposal to allow even greater accelerated depreciation deductions than those specified by MACRS.
Required:
Question 1: For which type of company would the change be more valuable, a company facing a 10% tax rate on one facing a 30% tax rate?
Question 2: If companies take larger depreciation deductions in the early years of an investment what will be the effect on reported earnings? On cash flow? On project NPVs? How do you think the stock market might respond if the tax law changes to allow greater accelerated depreciation?
Illustrate out all the calculation.