Cash Flow After Tax

A measure of financial performance that looks at the company's ability to generate cash flow through its operations. It is calculated by adding back non-cash accounts such as amortization, depreciation, restructuring costs and impairments to net income. Cash Flow Before Taxes less Income Tax Liability equals Cash Flow After Taxes. CFAT = Net Income + Depreciation + Amortization + Other Non-Cash charges Also known as "After-Tax Cash Flow".

CFAT is important for investors because it gauges a corporation's ability to pay dividends. The higher the CFAT, the better positioned a business is to make distributions. CFAT also measures the company's financial health and performance over time and in comparison to competitors. Tax liability represents the amount of income produced by the property that is subject to taxation. In this case, the propertys net operating income (i.e., income less operating expenses) is first converted to taxable income. This is accomplished by taking the net operating income and deducting for depreciation, mortgage interest, and amortized loan points. Then the taxable income is multiplied by the investors marginal income tax rate (i.e., combined fed and state) to calculate the investors income tax liability.

CASH FLOW ILLUSTRATIONS Illustration I Naveen Enterprises is considering a capital project about which the following information is available: The investment outlay on the project will be Rs. 100 million. This consists of Rs. 80 million on plant and machinery and Rs. 20 million on net working capital. The entire outlay will be incurred at the beginning of the project. The project will be financed with Rs. 45 million of equity capital, Rs. 5 million of preference capital, and Rs. 50 million of debt capital. Preference capital will carry a dividend rate of 15 percent; debt capital will carry an interest rate of 15 percent. The life of the project is expected to be 5 years. At the end of 5 years, fixed assets will fetch a net salvage value of Rs. 30 million whereas net working capital will be liquidated at its book value. The project is expected to increase the revenues of the firm by Rs. 120 million per year. The increase in costs on account of the project is expected to be Rs. 80 million per year (This includes all items of cost other than depreciation, interest, and tax.) The effective tax rate will be 30%. Plant and machinery will be depreciated at the rate of 25 percent per year as per the written down value method. Hence, the depreciation charges will be:

First year : Rs. 20.00 million Second year : Third year : Fourth year : Fifth year : Rs. 15.00 million Rs. 11.25 million Rs. 8.44 million Rs. 6.33 million Determine the project cash flows

Items 1 2 3 4 Fixed assets Net working capital Revenues Costs (other than depreciation & interest)

0 (80.00) (20.00)

120 80

120 80

120 80

120 80

120 80

5 6 7 8 9 10 11 12 13 14

Depreciation Profit Before Tax Tax Profit After Tax Net Salvage value of fixed assets Recovery of Working Capital Initial Outlay Operating Cash Flow ( 8 + 5 ) Terminal Cash Flow ( 9+ 10 ) Net Cash Flow ( 11 + 12 + 13 ) (100.00) 100 (100.00)

20 20 6 14.0

15 25 7.5 17.5

11.25 28.75 8.63 20.12

8.44

6.33

31.56 33.67 9.47 10.10

22.09 23.57 30.00 20.00

34.0

32.5

31.37

30.53 29.90 50.0

34.0 80

32.5 65

31.37 53.75

30.53 79.90 45.31

Book value of Investment