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When calculating the Net Cash Flow; Mr. Moffet used (Operating Flow)- Tax(Operating Flow*30%) + (CA* 30%) = Net Cash Flow. But Some study says it’s wrong. it supposed to be (Operating Flow) – Tax( Operating Flow*(1-30%)) + (CA*30%) = Net Cash Flow. Which one is correct?
To calculate net cash flow in investment appraisal, you need to follow these steps:
Identify Cash Inflows and Outflows: Determine all expected cash inflows from the investment, such as revenues, and all cash outflows, including production costs and any additional expenses.
Calculate Operating Cash Flow
After calculating the operating cash flow, deduct any applicable taxes to arrive at the net cash flow.Consider Depreciation: Remember that depreciation is a non-cash expense and should be added back to the net cash flow since it does not affect cash.
Adjust for Timing: Cash flows are typically assumed to occur at the end of each year for simplicity, although in practice, they may be spread throughout the year.
Account for Working Capital: If additional working capital is required at the start of the project, this should be included as an outflow.
By following these steps, you can effectively calculate the net cash flow for your investment appraisal.
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