help with reading 28

CFA Level II
#1

In Corp. Finance Reading 28. Can someone explain this to me please? Higher than expected inflation increases the corporations real taxes because it reduces the value of the depreciation tax shelter???

#2

you bought your equipment say 10 years ago. based on that value you are depreciating the value of the equipment on your balance sheet. if you bought the same equipment today - you would pay a much higher (inflated) value – due to higher inflation now, than when you bought your equipment, so the depreciation expense you are making is actually lower. so given the depreciation expense is lower - your depreciation tax shield is actually lower - and hence your real taxes are higher.

#3

Thanks, it makes sense to me now… you da man cp

#4

thanks cpk