Abstract
* One aspect of capital budgeting that has been largely unexplored is the determination of optimal tax lives of depreciable assets. The useful life (UL) literature tends to focus on service life rather than on tax life issues [2, 4, 5]. The primary purpose of this article is to argue that managers should not view ULs as exogenous, but instead as decision opportunities that require economic analysis rather than accounting judgment. For any depreciable asset, there will be more than one allowable useful life alternative for tax purposes. A shorter life election will provide faster depreciation recapture, but may provide less total recapture if it is attended by a higher estimated salvage value. A longer life election may provide a larger investment tax credit. The problem is to choose the allowable useful life that will maximize present value.
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