Wk 5 Discussion – Financial Management Tools [due Day 3]
Estimating cash flows isn’t difficult, but it is complicated, as there are a lot of little details to keep track of. Having a systematic approach to handling and arranging details is key to successful finance management and advancing organizational goals.
Respond to the following in a minimum of 175 words:
- Discuss a business example that shows how depreciation and accelerated depreciation can affect project cash flows.
- What would your process be to ensure that all related financial details are allocated for and tracked so as to assist in making sound business decisions?
Accelerated depreciation helps to increase the overall net present value of a project because it will reflect a higher amount of depreciation tax shield, which will increase the overall net present value of that project because a higher depreciation tax shield will result in higher amounts of cash inflows for the company in the early years and higher amounts of depreciation in the first year will increase the project’s net present value overall.
It is always preferable to reduce the Deep depreciation tax shield in later years and allocate more towards earlier years and it is preferable to adopt the accelerated depreciation method as normal depreciation methods will offer depreciation mostly in later years and it will be living into a lower amount of depreciation tax shield which will be claimed in the books of accounts.
Since depreciation tax is a component of operating cash flow and will be taken into account in the incremental cash flows when we adopt the net present value method, we will be attempting to ensure that all cash flows and depreciation had been adequately discounted in the initial years and had been adjusted with the depreciation tax shield in order to arrive at net present value.