Depreciation in project evaluation — identify the complete truth Which statement best captures the role and behavior of depreciation in chemical plant economics?

Introduction / Context:
Depreciation is a non-cash accounting charge that allocates the cost of long-lived assets over their useful life. Even though no cash leaves the firm when depreciation is recorded, it lowers taxable income and thus affects after-tax cash flow. Understanding its behavior across methods is critical for comparing alternatives.

Given Data / Assumptions:

• Straight-line method spreads cost evenly across years.
• Plant assets physically and economically decline over time.
• Corporate taxes apply to taxable income after depreciation.

Concept / Approach:
Under straight-line, annual depreciation charge = (cost − salvage) / life, a constant number each year. Depreciation reflects wear, obsolescence, and time (economic depreciation), and although the accounting schedule may differ from physical decay, it captures the loss of ‘‘book’’ value. Taxable income is revenue − expenses − depreciation; thus depreciation reduces taxes even as it does not consume current cash.

Step-by-Step Solution:

Verification / Alternative check:
Cash flow after tax often uses: CF = (revenue − cash expenses − taxes) + depreciation tax shield. The shield equals tax rate * depreciation.

Why Other Options Are Wrong:

Common Pitfalls:
Confusing depreciation with a cash outlay; failing to include the depreciation tax shield in project NPV; or mixing tax and book lives with economic life.

Final Answer:
all (a), (b) and (c)