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Hello tutor,I have a query about NPV calculation,as we know the tax calculate is based on the net operating cash flows,but I don’t understand why this figure have been included in the tax calculation in a question
“due to undertaking this project another project which generate annual contribution before tax of $4,000 will not be able to proceed . This constraint will be only for 2 years”
Which the answer is put the $4000 in y1 and y2
Is it not part of the opportunity cost which not related to operating cash flow?
Hope I can get an answer from you,Thank you very much.Opportunity costs are cash flows. Always in NPV calculations we are looking at the cash flow effects on the company. If the company do this project then they will be losing cash of 4,000 that they would have otherwise received – therefore it is treated as a cash outflow.
Since the 4,000 is before tax, then although they will lose the 4,000 that they would otherwise have received, they will be saving the tax on it they would otherwise have had to pay.
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