Optimal tax depreciation with uncertain future cash-flows

Menachem Berg, Anja De Waegenaere, Jacco L. Wielhouwer

Research output: Contribution to journalArticlepeer-review


Since taxable income consists of cash-flows reduced with depreciation charges, the choice of the depreciation method affects taxable income in future periods. A manager can therefore try to minimize the present value of future tax payments by choosing a particular depreciation method among those that are accepted by the tax authorities. We focus here on the choice between the two most commonly used methods in practice, i.e. the straight line depreciation method (SDM) and an accelerated depreciation method (ADM), such as the double declining balance (DDB) method and the sum of the years-digits (SYD) method. We show how the optimal choice depends on the discount factor, the degree of uncertainty in future cash-flows, and the structure of the tax system.

Original languageEnglish
Pages (from-to)197-209
Number of pages13
JournalEuropean Journal of Operational Research
Issue number1
StatePublished - 1 Jul 2001

Bibliographical note

Funding Information:
Menachem Berg gratefully acknowledges financial support from the NWO grant B45-164. The authors thank two anonymous referees for comments that helped to improve the paper significantly.


  • Decision theory
  • Depreciation
  • Tax minimization
  • Uncertainty

ASJC Scopus subject areas

  • General Computer Science
  • Modeling and Simulation
  • Management Science and Operations Research
  • Information Systems and Management


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