Distortions Imposed By Inflation on Historical-Cost Depreciation
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The use of historical-cost depreciation in
periods of persistent inflation decreases the
present value of depreciation deductions, thus
understating the true economic cost of capital
and increasing the real after-tax rate of return
required by potential investors. Efforts to correct
these problems by adopting depreciation
methods that allow for artificially short recovery
periods or accelerated rates do not provide
an adequate solution. Distortions imposed by inflation
on historical-cost depreciation can be
adequately corrected by indexing the historical-cost
basis.