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Chapter 4
Approach to long NPV questions
4.1 Layout
T 0 T 1 T 2 T 3
$ $ $ $
Operating cash inflows X X
Operating cash outflows (X) (X)
–––– ––––
Net operating cash flow X X
Tax on net operating cash (X) (X)
flow (1 year in arrears)
Investment (X)
Scrap value X
Tax savings from tax- X X X
allowable depreciation
Working capital (X) X
Total net cash flows (X) X X X
Discount factor 1 x x x
Present Value PV PV PV PV
NPV X
Remember to add an extra year to the project life if tax is paid a year in arrears.
If a question has both tax and inflation use the money method:
Inflate the cash flows unless they are given in money terms
Tax-allowable depreciation calculations and working capital calculations should
be done on the inflated figures
Use a post-tax money (inflated) discount rate
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