Question

What would cause the PV of the expected net cash inflows for a project to be different from the PV of the expected net profit after tax for the project?

Answer 1

Net cash inflows are different than net profit after tax.

Net cash inflows are pure net cash of an entity. The net profit after tax is not necessary a pure cash element.

The present value is applied on money or cash directly hence it gives understandable or comprehensive result which can be related to time value of money concept.

Net profit after tax has few non-cash items like depreciation, intangible assets written off etc. which finally results in lower tax. Lower tax means lesser cash outflow. As non-cash items deflate the net profit after tax hence it will result in lower present value. Whereas in case of Net Cash inflows we will experience higher PV because net cash inflows ignore non-cash items.

Hence in general scenarios, PV of Net Cash Inflows will be greater than PV of Net Profit After Tax.