Reading 31, Page 63, Section 8.2 (CFA Inst. Handbook). It says that Economic Income is the investment’s after tax cash flow plus change in market value. I am confused if this is net aftertx operating cash flow or total after tax cash flow ? In the exercises of reading 31, question 33, while calculating the economic income they have considered only operating cash flow. Cash Flow has been computed as EBIT (1-tax) + Depreciation. Whereas, if you take the net after tax cash flow it would be EBT(1-tax) + Dep. Can someone please clarify/explain this ?
They’re the same. When calculating cash flows for a capital budgetting exercise, don’t include interest costs - they’re captured in the discount rate. So, if I=0, EBIT=EBT.
Yup. And this exact same thing is explained in the text of the reading as well. If you include the interest expense you will be double counting it since its already been incorporated in the discount rate.