FIN 3504 Chapter Notes - Chapter 1: Cash Flow, Tax Shield, Sunk Costs
Document Summary
Because we are ignoring any financing expenses, such as interest, in our calculations of project. Ocf, we can write project net income as: If we simply add the depreciation to both sides, we arrive at a slightly different and very common expression for ocf: Perhaps the most obvious way to calculate ocf is: This is the top-down approach, the second variation on the basic ocf definition. The third variation on our basic definition of ocf is the tax shield approach. This approach will be useful for some problems we consider in the next section. The tax shield definition of ocf is: where t is again the corporate tax rate. Assuming that t = 34%, the ocf works out to be: The second part of ocf in this approach is the depreciation deduction multiplied by the tax rate. We know that depreciation is a noncash expense.
