Discounted Cash Flow

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susiewong
susiewong Registered Posts: 29 Regular contributor ⭐
in AAT Level 4 (Level 8 in Scotland)
Hi, I hope somebody can help me???

When calculating a discounted cash flow, if you were given the deprecation charges as well as the annual running charges, would you include both costs or just the running costs? Unfortunately I've not come across this scenario in my Kaplan books?

Thanks susie

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  • crispy
    crispy Registered Posts: 466 Dedicated contributor 🦉
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    Hello,

    I would exclude the depreciation cost from the investment appraisal - as it is not a cash item. You should include in your calculation of NPV any incremental cash income/expenses (and opportunity costs) as a result of the new project being taken on. Hope this helps,
  • susiewong
    susiewong Registered Posts: 29 Regular contributor ⭐
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    Hi, thanks for that, I was thinking along the same lines also and am so glad I didn't include the costs in my answer.
    Thanks for your help
  • PGM
    PGM Registered Posts: 1,954 Beyond epic contributor 🧙‍♂️
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    crispy wrote: »
    Hello,

    I would exclude the depreciation cost from the investment appraisal - as it is not a cash item. You should include in your calculation of NPV any incremental cash income/expenses (and opportunity costs) as a result of the new project being taken on. Hope this helps,

    I agree. You have to work it out on actual cash flows. So instead of depreciation you would put the final disposal income of an asset at the end of a project (assuming its still worth anything)

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