Formula for net cash inflow of a project is :
Net Profit after tax + Depreciation
In capital budgeting, a project is evaluated on the cash it generates, not on its accounting profit. The annual net cash inflow is commonly called cash flow after tax (CFAT).
Depreciation is deducted while computing profit and so reduces tax, but it involves no cash outflow. Starting from net profit after tax, depreciation must therefore be added back: \( \text{CFAT} = \text{EAT} + \text{Depreciation} \).
Sales minus operating expenses is a pre-tax figure that ignores the tax actually paid, so it overstates the cash inflow. Gross profit plus depreciation leaves out operating expenses and tax altogether.
Deducting interest and tax from sales less operating expenses (which include depreciation) gives exactly net profit after tax; it omits the depreciation add-back, so it understates the cash the project generates.
Hence, Net Profit after tax + Depreciation.
Similar Questions
Which of the following techniques for appraisal of investment proposals are based on time value of money ?
(a) Accounting Rate of Return
(b) Internal Rate of Return
(c) Profitability Index Method
(d) Earnings Per Share
Codes :
Which of the following is not true with reference to capital budgeting ?
In certainty equivalent approach, adjusted cash flows are discounted at :
In capital budgeting, the term capital rationing implies :
Interim cash inflows are reinvested at a rate of return equal to the internal rate of return is the built-in-mechanism for
Assertion (A) : When two or more investment proposals are mutually exclusive, ranking the proposals on the basis of IRR, NPV and PI methods may give contradictory results.
Reason (R) : The contradictory results in the ranking are due to differing dimensions relating to the scale of investments, cash flow patterns and project lives.
Indicate the correct answer :
Codes :
Match the items of the following two lists and suggest the correct code :
List – I List – II a. Pay-back Rate of Return i. Discounted Cash Flow Technique b. Internal Rate of Return ii. Compounded values of investments and returns c. Benefit Cost Ratio iii. Crude method for project evaluation d. Net Terminal Value Method iv. Varying sized projects evaluation Codes :
a b c d
Important Questions from Capital budgeting decisions
- Under which one of the following situation a firm can not raise capital for a project under any circumstance ?
- Which of the following statement about Finance lease is NOT true ?
(i) Finance lease transfer substantially all the risks and rewards incidental to ownership of an asset.
(ii) The lease period in a finance lease covers a substantial portion of the asset's economic life.
(iii) Payment towards lease rental in finance lease cover all cast incurred by lessor in obtaining the assets.
(iv) Finance lease is considered short-term in nature. - Assertion (A): Compounding interest allows an investment to grow faster over time compared to simple interest.
Reason (R): Simple interest earns interest on Previously earned interest. Which of the following variables is not known in Internal Rate of Return methods of capital budgeting?
- As per the Union Budget 2022, how many crore has been made to cover 3.8 crore households in 2022-23 under Har Ghar, Nal Se Jal Scheme?
