ADJUSTING DEPRECIATION IN AN INFLATIONARY ECONOMY: INDEXING VERSUS ACCELERATION

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Abstract
With the existing "historic cost" method of depreciation, higher inflation rates reduce the real value of future depreciation deductions and raise the real net cost of investment. The calculations in this paper show that this rise in the net cost can be quite substantial at recent inflation rates. The effects of inflation on the net cost of investment can be eliminated by indexing depreciation. A more accelerated depreciation schedule can also lower the net cost of investment and make that net cost less sensitive to the rate of inflation. The current paper examines a particular acceleration proposal and finds that, for moderate rates of inflation and real discount rates, the acceleration proposal and full indexation are quite similar.

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