NOPAT- Add back the depreciation expense?

CFA Level II Corporate Finance
#1

Hi there,

NOPAT is EBIT (1-t). Do we need to add back the depreciation expense since we removed it to come up with the actual value of the operating cash flows after tax?

Thanks!

#2

Yes, starting from EBIT you need to add back the full amount of depreciation:

OCF =EBIT * (1 - t) + D&A + ∆ NWC

However, starting from EBITDA you only add-back the depreciation tax-shield:

OCF =EBITDA * (1 - t) + t * D&A + ∆ NWC

D&A is a non-cash item and has to be cleared out in any CF calculation.

Regards,

Oscar