depreciation and depreciation tax shield

CFA Level II Corporate Finance
#1

Corporate Finance: cash flow adjustments for depreciation

for incremental cash-flow of a project, the depreciation tax shield is added to after-tax operating income

while for calculating cash-flow of economic income, the wjole amount of depreciation is added back to EBIT(1-t)

WHY IS THE CASE? WHEN SHOULD WE ADD BACK DEPRECIATION or DEPRECIATION TAX SHIELD TO GET CASH-FLOW?

#2

When you use EBIT(1-T) you need to add back the FULL depreciation expense. When you use EBITDA(1-T), you only need to add back the depreciation tax shield.

#3

Depreciation is a non-cash item, you always adjust for it to arrive CF.

When you start from NI, EBT or EBIT add the whole depreciation; when you start from EBITDA add only depreciation * tax rate.