Economics Capital Budgeting Questions
The impact of depreciation on capital budgeting decisions is that it reduces the taxable income of a company, which in turn reduces the amount of taxes the company has to pay. This reduction in taxes increases the cash flows available for the company to invest in new capital projects. Additionally, depreciation is considered as a non-cash expense, meaning it does not require an actual outflow of cash. This allows for a more accurate assessment of the cash flows associated with a capital project, as it reflects the true economic cost of using the assets over their useful life. Overall, depreciation plays a significant role in determining the profitability and feasibility of capital budgeting decisions.