An analyst gathered the following data abt a project. cost 8000, shipping and instatllation 2000 the project will generate a cash flow of 5000 and a cost of 2000 per year for the next 5 years…cost doesnt include depreciation the machine will be depriciated on SL basis in 5 years the tax rate is 40 percent and wacc is 10 percent what is the npv? a) - 144 b) 144 c) 279 d) 1244 i am confused as to how to calcuate after tax cash flow in question like this…answer is a which require annual cash flow of 2600 tax will be 400 (because (5000-2000-2000)*0.4) then after tax cash flow will be 5000-2000-400=2600 but do we include depreciation or cost on question like this…in the notes they say that capital budgeting is done on the basis of incremental cash flow and not on the basis of accouting income…well if we consider cost then inst that kind of income…???
depreciation has to be considered for tax purposes which affects cash flows so 5000-2000-2000=1000*.6=600 is NI in each year and then add back depreciation just like in indirect cash flow statement and you get 2600 in AFTER-TAX cash flows each year if you used 5000-2000=3000 for calc of tax, it’s incorrect because depr. is tax deductible. Hope this helps.