Optimal Tax Reduction by Depreciation : A Stochastic Model

This paper focuses on the choice of a depreciation method, when trying to minimize the expected value of the present value of future tax payments.In a quite general model that allows for stochastic future cash- ows and a tax structure with tax brackets, we determine the optimal choice between the straight line depreciation method and a speci c accelerated depreciation method. We show how the distributions of the cash- ows, the discount rate, and the tax structure can in uence the optimal decision.These results are illustrated by numerical examples.Contrarily to what is often assumed, the fact that future money is discounted does not necessarily imply that an accelerated depreciation method is preferable to a straight line method.