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Hi Tutor,
I got a little bit confused.. it may be because my concept is not that clear.
Hope you can help me on this.I have three questions,
First, for calculating EVA.. the formula is NOPAT-(WACCx capital employed). Under NOPAT, do we include the interest part to come up with the NOPAT? Or should we take out the interest part? As I understand the WACC has already factor the interest rate, thus, the NOPAT should not include the interest portion?Secondly, When we calculate FCF… some past exam questions gave us all details such as sales, costs, int and depn. The solutions sometimes include Finance cost (minus the interest) before calculating the tax on profit and minus reinvestment. Do we suppose to include interest?
Last question, when calculating NPV, I saw many questions, the solutions just ignored the depreciation when they calculate the cash flow and just added back the tax allowable benefit. However, I saw some of them, they did include depreciation in calculating the cash flow.
If you could please clear my concept, it would be greatly appreciated.
Many thanks.
CathyEVA – you take out the interest (after tax)
FCF – no, don’t include interest (the WACC account for the after-tax interest)
NPV – There are two ways of dealing with tax. Either calculate the tax on profit before capital allowances, and separateley calculated the tax saving on the capital allowances, or, alternatively, calculate the profit after capital allowances, then calculate the tax, then add back the capital allowances (because they are not a cash flow).
Both approaches I’ve the same answer, although the first approach is generally quicker and safer.
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