When we are doing investment appraisal of a single project then we have cash flows only and then we subtract the tax- allowable depreciation before tax and then we add it back after tax so that we could get tax relief.
Similarly when we are calculating value of the firm, we start from accounting profit before interest and tax, then we calculate tax and afterwards add depreciation (which is assumed to be the tax allowable depreciation) and then afterwards we do the other workings for re-investment etc.
here in accounting profit should we not use accounting depreciation and other non-cash items to add in it and then subtract the tax-allowable depreciation and then tax charge.
and also please explain the tax charge which is calculated on the accounting profit. is it net of tax or without considering interest.
Please clarify the difference between value of equity and value of firm when using acconting profit.
Also please "do we take tax after taking the effect of interest in NOPAT calculation or just ignore it.
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Free Cash-flow Method and NOPAT
12y ago#1Your first two paragraphs are fine, but I am a bit confused as to what you are asking in the next sentence.
If we are are asking about using free cash flow to get the value, then for the value of the firm as a whole we use free cash flow before interest, but after tax (what the tax would be if there was no interest).
If we are asked to use free cash flow to equity to calculate the value of the equity, then we take the off both the interest and the tax.
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