Depreciation, its tax credit implication and the terminal year effects of capital not yet depreciated are important considerations. The LT Plan Depreciation Method attribute can be set to either:
In addition these methods require input of Tax Rate and Inflation Rate.
These methods affect the annuity calculations for Project x as follows:
For both methods we compute both real and nominal annuity factors:
For straight line:
For declining balance:
The Generator attribute Generator Declining Depreciation Balance attribute is provided and used as follows:
The key point to note with both of these formulations is that the tax effect of depreciation must be treated on a nominal basis, hence the adjustment of the real WACC by the rate of inflation. Also note that if no WACC rate is set, the discount rate is used.