Inflation and Depreciation question

Discussion in 'Exams and Studying' started by Excelmonkey, Jan 12, 2019.

  1. Excelmonkey

    Excelmonkey

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    I'm currently practicing an NPV question and one of the things I've never really understood is why, if you are calculating the cashflows adjusted for inflation, why you don't have to calculate the depreciation adjusted for inflation? Or even the sale value of the asset adjusted for depreciation?

    Sure this is a stupid question but it's always made me think in exams.
     
    Excelmonkey, Jan 12, 2019
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  2. Excelmonkey

    kirby VIP Member

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    Your cash flows are affected by inflation. The depreciation expense is not a cash outflow of the future (asset was already paid for in the past).
    Depreciation does not further affect the sale value of the asset. The asset sells based on market value. For example, assume you bought a computer and depreciated it fully. Then it is identified as a collectors item and you sell it for a fortune.
     
    kirby, Jan 13, 2019 at 2:41 AM
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    Becky likes this.
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