1.

0 INTRODUCTION
This discussion will focus on depreciation expense on cash flow analysis of a capital project followed
by types of leasing arrangements relating to depreciation expense.
Chandra (2010) espoused that depreciation is a decrease in value of an asset due to use over time
treated as a cost. Furthermore, Drew (2014) supported that a lease a is a legal contract whereby the
owner of a property or an asset agrees with a user on the use of some asset.
 
2.0 IMPACT OF DEPRECIATION EXPENSE ON THE CASH FLOW ANALYSIS OF A CAPITAL
PROJECT
Much as depreciation is treated as an expense on an income statement, it is not necessarily a cash
movement, so during analysis of capital project it is not included in net present value evaluation nor
in internal rate of return evaluation for a cash flow of a capital project. However, Heisinger (2012)
espoused that depreciation reduces income taxes to be paid on an income statement due
depreciation tax shield in this way it increases the net profit after tax which could have been low if
there were high taxes due to absence of not taking the expense into consideration.
 
3.0TYPES OF LEASING ARRANGEMENTS
 
This section will discuss how a lessor(owner) and a lessee(user) can agree a lease.
 
3.1 Single-Net Leases Arrangement:
In this kind of arrangement, the lessee is responsible for paying property taxes. A business which
intends to grow crops can go for real estate lease, for example land. In this scenario, the agreement
can be for the lessee to be paying property taxes for usage of land.
 
3.2 Double-Net Leases Arrangement: These legal agreement makes a lessee responsible for
property taxes and insurance. When a business intends say to go for vehicle lease for quite some
years say 4, a lesser may lease a 3 tonner truck at to an agro dealing company. Hence, the
company will be paying for taxes for the vehicle to revenue authority on the other hand it will also be
paying for the insurance of the vehicle annually.
3.3 Triple-Net Lease Arrangement: Lessee who sign these leases pay property taxes, insurance,
and maintenance costs. For example, when FDH Bank in Malawi enter this type of arrangement with
Canotech Company, FDH has been paying for maintenance costs of photocopier machines to
Canotech. On other hand it pays for insurance to Nico insurance company to protect the equipment
(photocopier machines) apart from paying the tax for the photocopier to the revenue authority.
3.4 Gross Leases Arrangement: Lessee pay rent (i.e. for usage only) while the landlord is
responsible for other costs. When FDH Bank selected this arrangement with Temenos Software
Company in India, FDH selected a license lease for core banking software called T24. This meant
that FDH will only be paying for software license monthly. On the other hand, the lessor in India will
be paying for maintenance costs for example software upgrade. Furthermore, the lessor pays for
insurance and software taxes to the authorities.
 
4. PROS AND CONS FOR LEASING ARRANGEMENTS RELATING TO DEPRECIATION
EXPENSE
4.1 Pros
4.11Tax benefit
Heisinger (2012) espoused that depreciation expense reduces income taxes to be paid on an
income statement due depreciation tax shield in this way it increases the net profit after tax which
could have been low if there were high taxes due to absence of not taking the expense into
consideration.
4.12 Low Capital Expenditure
For a newly set business leasing is even much better due to lower initial cost than it would have
been if the entrepreneur would go for a loan in obtain purchasing the equipment which would cost
even higher.
 
4.2 Cons
4.21 Limited Tax Benefit at the beginning stage of lease
Phillip (2014) espoused that for a business that has commenced, the tax expense is likely to be
minimal especially at the beginning stages. Hence, there is no added tax advantage that can be
derived from leasing expenses.
 
5.0 RECOMMENDATION AND CONCLUSION
Lease finance is suitable for a business which cannot raise enough funds to buy the equipment or a
property in a first-go. Furthermore, depreciation expense is not included in cash flow analysis rather
it is treated as an expense on an income statement when an asset loses value.
 
6.0 REFERENCES
       Eugene F. Brigham, Phillip R. (2014). Intermediate Financial Management
       Heisinger, K., & Hoyle, J.B. (2012). Accounting for Managers. Saylor Foundation. Retieved
from https://resources.saylor.org/wwwresources/archived/site/textbooks/Managerial
%20Accounting.pdf
     Hill, R.A. (2008). Strategic Financial Management. Bookboon.com.
     Prasanna Chandra (2010). Financial Management   
     Stephen A. Ross, Michael Drew Et al. (2013). Fundamentals of Corporate Finance