The Choice of Depreciation Method Under Uncertainty

This study presents a framework for choosing between depreciation methods when future cash flows from operations are not assumed known with certainty but only in probabilistic terms. Specifically, the accelerated depreciation method and the straight‐line depreciation method are compared and mathematical conditions are derived for the depreciation method that should be adopted in different circumstances and under different tax systems. It is shown that, contrary to conventional wisdom, the straight‐line depreciation method is the preferred method for lowering the company's present value of tax liability in various realistic situations.