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Hi, I am a little confused how to treat straight line depreciation in NPV when it states in the question that it is included in the fixed costs. I am doing a question which states a company invests EUR1.4m in year 0 and it uses straight line depreciation. The depreciation charge is included in the fixed costs which total EUR470k. Do I need to do anything with the depreciation as it is already included in fixed costs.
I have calculated the depreciation charge as EUR350k (1.4m/4). Do I need to adjust my fixed costs to show that depreciation of EUR350k is included in year zero and then my year 4 fixed cost would be EUR120 (EUR470-EUR350)?
There are no scrap value or terminal value at the end of year 4.
Final question is my straight line depreacition for the 4 years or the 5 years.
Please do not ask the same question in more than one forum!!!
It is impossible for me to give a certain reply without seeing the full question. However, as you will appreciate from my free lectures, depreciation is not a cash flow and is therefore not relevant when calculating NPV’s. If depreciation is included in the fixed costs then it needs removing because, again, it is not a cash flow.
I cannot possibly tell you whether the depreciation is for 4 of 5 years because you have not told me which question you are referring to.
I do suggest that you watch me lectures – they are a complete free course for Paper FM and cover everything needed to be able to pass the exam well.
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