Depreciation expense refers to the value of the "wearing out of equipment, machinery, or another

asset, and help to state a true value for the asset" (Investopedia, 2019)

The following are implications of depreciation expense on the cash flow analysis of a capital project.
1. If depreciation expense is included in the financial statements, it will provide you a more accurate
computation and interpretation of the values in the financial statements. This includes financial
projections and profitability for a feasibility study.
2. This can also be used as an advantage for the company as it can be one of the basis for
computation reducing the company's tax liability.
3. This will help in the identification of the monetary value of a specific equipment/machinery should
the company decide to sell this after years of usage.

There are instances when a business will not have sufficient funds to finance the purchase/use of a
new equipment/machinery upfront. Thus, they consider the option of leasing such equipment. The
method of leasing has the following significant impact on the depreciation expense depending on the
arrangement as discussed by Merritt (n.d.):
1. If the arrangement is an operating lease or the equipment is rented, then there is no need to
consider depreciation expense because you will just include the amount of rent in your operating
expenses.
2. If the arrangement is capital lease which means that you will own the equipment, then the value of
depreciation should be included in your operational expenses on top of the expense related to the
payment schemes to fully own the equipment.

References:

Investopedia. (2019). When to Use Depreciation Expense Instead of Accumulated Depreciation.

Retrieved April 23, 2020, from https://www.investopedia.com/ask/answers/101314/when-should-i-
use-depreciation-expense-instead-accumulated-depreciation.asp

Merritt, C. (n.d.). What Are the Effects of a Lease in an Income Statement? Retrieved April 23, 2020,
from https://smallbusiness.chron.com/effects-lease-income-statement-71854.html