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how the selection of a depreciation affects after tax CF?

how the selection of a depreciation affects after tax CF?
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Answer #1

Depreciation is a non-cash, tax deductible expense. Due to its non-cash nature, it does not by itself impact cashflows. However, since it is deductible for tax purposes, choice of the method of depreciation can affect the amount of taxes due and therefore, impact after tax cashflows.

After tax cashflows = ((EBITDA - Depreciation - Interest) * (1 - tax rate)) + Depreciation

If the chosen depreciation method is more aggressive, then depreciation expense will be high leading to a lower before tax profit and therefore, lower tax expense. This will in all increase the after tax cashflows and vice-versa.

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