Economic vs. Accounting Income Differences

CFA Level II Corporate Finance
#1

On Schweser’s Book 2, P.238, there is a paragraph indicating the differentes between ECONOMIC and ACCOUNTING income. They say one of the differences is that accounting depreciation is based on the asset’s original cost, (and not market value) of the investment.

That is obvious. Now, isn’t depreciation also calculated based on original cost under ECONOMIC income? From what I understood, the calculation was just the incremental CF, plus any change in the market value of the investment. So, in other words, the depreciation calculated based on original cost would be implictly inserted on the incremental cash flow (which includes depreciation, that is calculated based on original cost of the asset). Can anyone clarify that for me?

Thanks!

#2

Economic depreciation means the loss due the market value change. When you approach the final CF, the present value (market value) of the business’s CFs get lower each period, so there you have your economic depreciation.

I would not try to link economic depreciation and accounting depreciation, they both serve different meanings.