NPV IRR Capital Investment Cash Flows

I have just been looking at a practice question for the synoptic regarding capital investment. It asked for the net cash flow to be filled in and the net present value, they provided further details in two columns: profit/loss for the five years and depreciation for the five years.

I answered with deducting depreciation off the profit each year to get the net cash flows, but when I checked the answer they had added depreciation to the profit. I don't understand why they added it together, I thought you added up all incoming money and deducted all outgoing money for cash flows - isn't depreciation an expense?

As always, any help greatly appreciated.

Best Answer

  • Imali
    Imali Registered Posts: 6
    Answer ✓
    Hi, I got tripped up on the same one, did it exactly the same as you. Here is the explanation I got from my colleague, and it worked when I re-did the task.

    Depreciation is a non cash expense. So if I buy a machine for 500k and depreciate it over 5 years the Depreciation of 100k per year reduces my profit but is not a cash outflow. Therefore my annual cashflow is equal to profit plus Depreciation..

Answers

  • Shelby111
    Shelby111 Registered Posts: 15
    Thank you so much for that, it makes sense now. This is the sort of thing you feel should have been covered in a lesson but only comes up in a random question just before you sit the synoptic.
    Thank goodness I had you to explain it to me! Thanks again.
  • Imali
    Imali Registered Posts: 6
    No problem, glad I could help. I am taking my synoptic this Thursday :D Good luck with yours
Privacy Policy