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Please explain depreciation topic in capital budgeting
please explain depreciation topic in capital budgeting
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Rucha rajesh shingvekar![best-answer]()
It is true that depreciation is a non cash expense. However depreciation is tax deductible. So the amount of depreciation we pay affects the amount of taxes we pay. Remember while calculating net income we remove the depreciation and amortization figure from earnings to arrive at Profit before Tax. This is the amount on which tax is levied and we get the Profit after Tax figure. Therefore, the higher the depreciation amount, the lower will be the taxable profit and as a result the lower will be the amount paid as tax. Depreciation, therefore indirectly affects the cash flow by reducing the amount of taxes paid and hence a high depreciation may actually have a positive impact on the cash flows!