Depleting US Strategic Oil reserves is all about election year damage control.

[Toddsterpatriot]

Your example is far too simplistic and makes incorrect assumptions. First, the discount rate for future cash flow, "r" is given at a static ten percent. I am guessing they are using the risk free rate of return although there was no mention where this was coming from. A true analysis would utilize the WACC for the discount rate--I mean it is the price you are paying for using that capital, rather it comes from shareholder equity or borrowed money. And as I have indicated, as the corporate tax rate changes that WACC changes as well. As I pointed out, when the corporate tax rate is too low and the WACC increases those future cash flows are discounted more heavily,

Then, depreciation. As the corporate tax rate decreases the value of depreciation also decreases. In your example anticipated future cash flows exceed the depreciation savings, but that is just it, those future cash flows are "anticipated", they are mere projections. The depreciation number is a hard number, it remains at a constant value that is only affected by the tax rate. A true capital investment evaluation would utilize a Monte Carlo stimulation of various projections of cash flow, some conservative, some optimistic. For the pessimistic projections the loss in the value of depreciation would result in further negative PV's at lower corporate tax rates.

From your source,

Note that this section is intended to give you a general overview of how income taxes effect capital budgeting decisions. Finance textbooks provide more detail regarding how to adjust cash flows for income taxes in more complex situations.

Like I said, overly simplistic. In effect, you literally ran away from the WACC equation and attempted to blow smoke. The equation clearly demonstrates that higher corporate taxes result in a lower WACC, and when discounting future cash flows by that WACC, it is easy to see how capital budget evaluations will trend more conservative as corporate taxes decrease. It is not how much money the company stands to make, as your simplistic example portrays, it is how much money the company stands to lose that holds the most sway. Thanks for proving how inept our current business schools are in teaching risk analysis in the capital budgeting process.

Well, if you think every investment you make is going to lose money, your desire for higher tax rates makes sense.