Deducting depreciation from operating cash flows would result in counting the initial investment twice in a discounted cash flow analysis.

Question

Quizplus · Accepted Answer

Depreciation is a non-cash expense that reflects the wear and tear of a company's assets over time. Deducting depreciation from operating cash flows would result in counting the initial investment twice because the cash used to purchase the assets was already accounted for in the initial investment, and depreciating them is an accounting measure that does not involve actual cash outflows. Hence, deducting depreciation from operating cash flows would overstate cash inflows and the overall value of the investment in a discounted cash flow analysis.

Deducting Depreciation from Operating Cash Flows Would Result in Counting