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    kmcneely's Avatar
    kmcneely Posts: 1, Reputation: 1
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    #1

    Sep 17, 2009, 12:52 PM
    Cash flows
    I am trying to calculate net present value from projected cash flows. I have a number for earnings before interest and tax and I have a number for depreciation. Do I subtract depreciation out of earnings to get the appropriate cash flow or do I ignore depreciation since it is not an actual cash outflow?
    ArcSine's Avatar
    ArcSine Posts: 969, Reputation: 106
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    #2

    Sep 17, 2009, 03:33 PM
    You want to add depreciation back to EBIT to get cash flow. Remember that depreciation expense has been treated as a deduction in arriving at EBIT. But since, as you've mentioned, depreciation expense is not a cash outflow, its presence in EBIT's calculation causes EBIT to be less than cash flow. Adding depreciation back to EBIT reverses out this effect.

    In fact, when you've added depreciation (and amortization expense, which is depreciation's close cousin), you arrive at another familiar metric: EBITDA (earnings before interest, taxes, depreciation, and amortization). EBITDA is sometimes used as a proxy for cash flow, after further adjusting for capital expenditures.

    Hope that helped out just a bit.

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