[OPE-L:3064] Re: John Ernst's OPE-L 3016

Duncan K. Fole (dkf2@columbia.edu)
Fri, 20 Sep 1996 09:21:38 -0700 (PDT)

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>Duncan K. Foley wrote:
>> the capitalist's point of view the important issue is the cash flow itself.
>> (This conclusion has to be modified to some degree in the light of
>> corporate income taxes that distinguish depreciation and profits.)
>Yes, but how do you measure ex ante cash flow? How do you even measure ex
>post cash flow without
>some adequate method of depreciation?

Well, the point is that cash flow is the sum of profits and depreciation,
so you don't have to distinguish them accurately ex post in order to
calculate the realized internal rate of return.

The ex ante problem is another kettle of fish, since it depends on
forecasting the demand for output.

>But there is no adequate method of depreciation.

"Adequate" for what purpose? The advantage to the capitalist of keeping
books is to judge how well he is doing. After the investment is scrapped he
can look back and calculate that unambiguously. The depreciation schedules
from a purely accounting point of view are intended to prevent the
capitalist from confusing the depletion of his capital with profit. As long
as they aren't wildly off, they would serve pretty well for that.


Duncan K. Foley
Department of Economics
Barnard College
New York, NY 10027
fax: (212)-854-8947
e-mail: dkf2@columbia.edu