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What is depreciation and how is it included in the net cash flow calculation presented in...

What is depreciation and how is it included in the net cash flow calculation presented in project valuation?

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Answer #1

Depreciation is the reduction in the book value of an asset over the life. Depreciation is used to calculate net income and also for calculation of tax.

Depreciation is a non cash expense however depreciation helps in tax savings. The Depreciation is subtracted before calculation of tax in calculating cash flow and after tax is deducted depreciation is added up to final income.
Cash Flow = ( Sales - COGS - Other expenses - Depreciation)*(1-Tax rate)+ Depreciation
The depreciation tax shied is extra increase in cash flow.

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