Comment, question or quotation of the day

18-01-2021 : Question from a reader.


"What's the point of straight-line versus accelerated depreciation? Indeed, since the accelerated depreciation makes it possible to defer part of the tax over time by initially recognizing a larger expense, one might think that all companies should opt for the accelerated method when allowed since deferring an expense over time means reducing it. »

 

The vast majority of companies that are eligible for accelerated depreciation make this choice for the reason you indicate. But not all of them.

Indeed, it is not of interest to a company that is not taxable and does not expect to be taxable for some time, or a company that has other ways of optimising its taxation and for which the accelerated depreciation method  is redundant. 

In addition, some companies may have an objective of achieving a minimum pre-tax profit over the next few years that would be thwarted by the use of an accelerated depreciation method, for example in the case of an earn-out mechanism in the event of the sale of the company, because a lower accounting result could minimise the earn-out to be paid to the sellers that would be indexed to the accounting result.

 

Have a pleasant day.

30-12-2020 : Question asked by a participant of ICCF@Columbia Business School.


“I have a project in the process of being created, part of the work on which has been carried out for a value of 205 and the work remaining to be done is estimated at 235. When calculating the NPV, is the amount of the investment to be taken into account 440 or just the remaining work to be done?”

 

Either the investments you have already made have a market value irrespective of the completion of the investment you plan to finish, in which case the selling price of the initial investments (which may be different from the 205 spent) should be taken into account in the cost of the investment. In fact, by finalising your investment, you are depriving yourself of the opportunity to sell the initial investments for a given price, which is a cost for you to take into account.

Or they are only of value in the continuation of the initial investment project, for example having repainted your car in yellow to make it a New York taxi, in which case they should not be taken into account because the continuation of your investment project does not deprive you of an opportunity to sell the initial investments, an opportunity which does not exist. To use my example, the question is no longer whether you should become a New York taxi driver, but whether, having repainted your car yellow, you should buy a taxi licence or not. 

Have a nice day



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The Vernimmen.com Letter

Number 135 of January 2021

News : How large listed European groups invest their cash balances in a negative interest rate environment

Statistics : Corporate capital raising has reached an all-time high in 2020

Research : The effect of activist funds on the financial and social performance of companies

Q&A : How does the cost of equity materialise?

COMMENTS : Comments posted on Facebook