The Daily Technical #52: How would a $10 increase in depreciation flow through the financial statements?

Good morning. Welcome to the 52nd edition of The Daily Technical. You’re here for one reason so let’s dive in.

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OVERVIEW OF YESTERDAY’S QUESTION
Conceptually, what does the discount rate represent?

The discount rate represents the expected return on an investment based on its risk profile (meaning, the discount rate is a function of the riskiness of the cash flows).

Put another way, the discount rate is the minimum return threshold of an investment based on comparable investments with similar risks.

A higher discount rate makes a company’s cash flows less valuable, as it implies the investment carries a greater amount of risk, and therefore should be expected to yield a higher return (and vice versa).

Common Mistakes

1. Ignoring the Risk Component: Overlooking this link can lead to misunderstanding the rationale behind valuing cash flows differently.

TL;DR

• The discount rate reflects investment risk and expected return.

• Higher risk equals a higher discount rate, reducing future cash flow value.

TODAY’S QUESTION
How would a $10 increase in depreciation flow through the financial statements?

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THAT’S A WRAP
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See you tomorrow,

The HirePrep Team