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  • 1.  NPV

    Posted 3 days ago

    Hi all, 

    I am studying the NPV calculation, and my material got me confused. One question adds back the depreciation when calculating the NPV and the other adds only the tax shield. I am not sure what I am missing, but anything helps here. shouldn't we add back only the tax shield?

    this one adds back the Tax Shield

    and this adds back depreciation. 



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    Cristina Barbosa Dias
    Controller
    Vancouver BC
    Canada
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  • 2.  RE: NPV

    Posted 3 days ago

    Hi,

    there is two ways to calculate the cash flows:

    1- add the tax shield back the after tax cash flow. if you apply this approach to the second question the calculation will be as follow:

     operating cash flow = 237000-85000= 152000

    after tax operating cash flow = 152000*(1-30%) = 106400

    depreciation tax shield = 90000*30% = 27000

    Total cash flow = 106400+27000 = 133400 same answer

    2- the conventional method is to add the full depreciation to the net income not to the cash flows.

    both ways will give you the same result, it's better to use the first approach.

    Whish you the best, good luck.



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    Abdul Karim Alziyab CMA
    Accountant
    Abu Dhabi
    United Arab Emirates
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  • 3.  RE: NPV

    Posted 2 days ago

    Hi Abdul,

    Thank you very much for replying. I should have elaborated more my question because I am still confused about one thing. 

    Problem number two is ok, I have no problem here, I do understand that the calculation goes revenues - expenses - depreciation = taxable income * tax rate = net income , then net income + depreciation = after tax cash flow.

    I do understand that to calculate the after-tax cash flows we must add back depreciation. However, on problem number one, the instructions says " after tax cash flow excluding depreciation". This saying " excluding depreciation" doesn't mean that the step of adding depreciation is missing and should be done? After tax cash flow excluding depreciation isn't just net income? 



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    Cristina Barbosa Dias
    Controller
    Vancouver BC
    Canada
    ------------------------------