Effects of Inflation on Project Cash Flows

We now introduce inflation into estimating project cash flows. We are especially interested in two elements of project cash flows — depreciation expenses and interest expenses — that are essentially immune to the effects of inflation. We also consider the complication of how to proceed when multiple price indexes have been used in generating various project cash flows.

Because depreciation expenses (as well as loan repayment) are calculated on some base-year purchase amount, they do not increase over time to keep pace with inflation. Thus, they lose some of their value to defer taxes as inflation drives up the general price level and hence taxable income. Similarly, salvage values of depreciable assets can increase with the general inflation rate and, because any gains on salvage values are taxable, they can result in increased taxes.

Project Management Made Easy

Project Management Made Easy

What you need to know about… Project Management Made Easy! Project management consists of more than just a large building project and can encompass small projects as well. No matter what the size of your project, you need to have some sort of project management. How you manage your project has everything to do with its outcome.

Get My Free Ebook

Post a comment