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Hello,
While solving using the BPP practice and revision kit to prepare evaluations / calculate NPV, I noticed that when we are dealing with depreciation, they are not including the depreciation expense in the calculations (as this is important to calculate correct income tax). If they say it is included in variable/fixed costs, then it(depreciation expense) should be added back to the net cash flow as this is a non-cash item. I am really confused, am I missing anything here?
Ref.: Example No. 163 Uftin Co (December 2014, amended; page 60).
Can someone assist pelase?
Thanks in advance.Welcome to the Opentuition forums. The key here is to consider what investment appraisal is seeking to achieve. Basically you want to assess cash flows. Depreciation is not a cash flow. If included in cost you must add back to get real cash flow which can then be discounted. The same applies to other non-cash expenses such as amortization. Hope this helps.
Thanks. This is what I am talking about but it has never been solved like that. Depreciation expense is not been added to obtain real cash flow when the investment appraisal is assessing cash flows.
Do you think I should solve the exam questions in the same way they are solved?The following thread might help you-
https://opentuition.com/topic/add-and-deducting-taxes-and-tax-allowable-depreciation/
You can also ask the tutor on this site if you have any future questions-
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