Final answer:
The method of depreciation used can impact the total tax bill over the life of a project, but the total depreciation expense and tax deduction will be the same. Prime cost method evenly spreads the depreciation expense, while diminishing value method front-loads the depreciation expense. The choice of method affects the timing of tax deductions, but not the total amount of depreciation deducted over the life of the project.
Step-by-step explanation:
The method of depreciation used, whether it is prime cost or diminishing value, can have an impact on the total tax bill over the life of a project. Prime cost method evenly spreads the depreciation expense over the useful life of an asset, while diminishing value method front-loads the depreciation expense. If the useful life of the asset is shorter under diminishing value method compared to prime cost method, the depreciation expense will be higher in the earlier years. This means that the total tax deduction for depreciation will also be higher in the earlier years, resulting in a lower tax bill. However, over the life of the project, the total depreciation expense and tax deduction will be the same for both methods. For example, let's say we have an asset with a cost of $10,000 and a useful life of 5 years. Under prime cost method, the annual depreciation expense would be $2,000 ($10,000 / 5 years). Under diminishing value method with a depreciation rate of 40%, the first year's depreciation expense would be $4,000 ($10,000 * 40%). In the second year, it would be $2,400 ($6,000 * 40%). Over the 5-year period, the total depreciation expense would be $10,000 for both methods.