CEVAP:

Depreciation is considered as a relevant cash flow to capital investment project evaluation which should be included in the analysis. In fact, depreciation is a non-cash expense item, but it affects the taxable income of a company. It means that although one does not need any cash to pay depreciation expense each year, it changes the amount of taxes paid which is a cash expense. Remember the income statement and note that depreciation expense is subtracted from revenue, and EBITDA (earnings before interest, tax, depreciation and amortization) is found. It means that it is deducted before the tax expense is calculated. By this way, depreciation creates a tax-shield. Likewise, in capital investment project’s income statement, depreciation is deducted before the tax expense is calculated. To calculate the cash flow of a project, we should add depreciation amount back to the project’s net income.