BU393 Chapter Notes - Chapter 10: Sunk Costs, Cash Flow, Cash Cash
Document Summary
Chapter 10: capital budgeting estimating cash flows. Cca system based on declining balance depreciation method and assigns assets to property classes". Annual depreciation expense: product of depreciation rate and undepreciated capital cost. = !, where dr = depreciation rate and !!! = undepreciated capital cost at the end of previous year (year t 1) Capital cost: original cost of asset + other costs associated with installing asset (!) Book value of the asset: undepreciated capital cost = capital cost accumulated depreciation. The half-year rule: when asset is purchased partway through a year, then it should be depreciated for remaining fraction of the year assumes assets are purchased in middle of year. Depreciation creates tax shield the same way as interest. Depreciation expense is tax deductible reduces taxes by amount equal to product of expense and corporate tax rate. Cash flows are higher in deductibility world b/c taxes are lower: difference = depreciation tax shield.
