Depreciation and Its Importance to Investment Decision in the Czech Republic[Odpisy a jejich význam při hodnocení efektivnosti investic v podmínkách České republiky]

Depreciation expresses impairment of an asset and decreases its net book value stated in the balance sheet. It allows attributing purchase cost of an asset across its useful life and it is considered to be a financial resource. In the capital budgeting theory and practice in the Czech Republic it is necessary to distinguish accounting, managerial, and tax depreciation and take into account specifics resulting from Czech accounting and tax legislation. Expected investment cash flows are influenced not only by depreciation of new purchased assets, but also by depreciation of present assets, even thought the asset purchased cost has been "sunk". Cash inflows resulting from the depreciation tax shield can be considered as the main impact of depreciation on investment cash flows. Capital decision should include selection of an appropriate method of tangible assets tax depreciation, which ensures maximization of present value of depreciation tax shields.