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    lstrong55416's Avatar
    lstrong55416 Posts: 1, Reputation: 1
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    #1

    Nov 16, 2009, 03:05 PM
    Calculation of NPV - Initial Investment
    When calculating NPV, many text books indicate that the after-tax cash flows should be used. Does this apply to the Initial Investment.

    For example - if required $50,000 for a project that produced annual cashflows of $65,000 for three years (9% WACC) (40% tax rate) then does the $50,000 get reduced by the taxes or just the annual cash flows. Why or why not?
    ArcSine's Avatar
    ArcSine Posts: 969, Reputation: 106
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    #2

    Nov 16, 2009, 03:49 PM
    No and yes. No, not directly... the key to any PV work is getting all the expected cash flows scheduled out accurately, and that 50k should stand as-is, as an immediate outlay, in that schedule.

    But the cost of the asset might give rise to tax-deductible depreciation deductions, in which some or all of the cost is deducted against taxable income over a prescribe time frame. It depends on a lot of factors, including the nature of the asset.

    If so, then you'd want to include the resulting tax savings (as positive elements) in that same cash flow schedule.
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