depreciation is a necessary assumption when calculating comparative cash flow for:

Expert Solution

I think that your question is not complete but let me answer it to the reach that you provide data for:

The depreciation, in accordance with the accounting terminology, is a systematic reduction in the value of a fixed asset due to its usage. Nevertheless, it implies no cash outflows and that´s why is considered a "virtual expense". The depreciation needs to be recorded every period, keeping pace with the utilization of the underlying asset, complying thus with the matching accounting principle.

When the companies elaborate the income statement, they are allowed to substract the depreciation expense for the period which makes it a tax deductible element (similar to the interest expense). So, it impacts on the net profit.

However, when you prepare the cash flow statement or the free cash flows for projects´ evaluation, you need to add back the depreciation because, as I mentioned, it implies no cash outflow and, therefore, does not impact directly your cash position. In other words, you make an adjustment to your profit declared on the IS.

jeff jeffy answered 5 months ago

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