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In my upcoming Finance exam, I might have to compare 2 projects (Make vs Buy) with...

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Finance

In my upcoming Finance exam, I might have to compare 2 projects(Make vs Buy) with the NPV rule. Initial investment amounts, pretax cash inflows, pre tax cash outflows, WACC and tax rate aregiven. How do I have to deal with depreciation in both cases (Makeand Buy)? Normally, I deduct the annual depreciation from the netcash flow (pre-tax) to determine EBT, then Tax CF and ultimatelyfind the after tax Net CF. Do I have to apply any givendepreciation here for both options (Make vs. Buy) just as usual?TIA

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4.2 Ratings (720 Votes)
Effect of depreciation for BUY decision making Under NPV calculation The basic thing about NPV that it stands on the foot of cash flows Depreciation is not a cash flow so when stream of cash flows are calculated the depreciation is not considered The use of depreciation in the NPV calculation is that it reduces the tax amount and acts as a tax shield Suppose the net sales of the firm is 100000 and the tax rate is 30 Therefore the taxable amount is 30000 From the    See Answer
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In my upcoming Finance exam, I might have to compare 2 projects(Make vs Buy) with the NPV rule. Initial investment amounts, pretax cash inflows, pre tax cash outflows, WACC and tax rate aregiven. How do I have to deal with depreciation in both cases (Makeand Buy)? Normally, I deduct the annual depreciation from the netcash flow (pre-tax) to determine EBT, then Tax CF and ultimatelyfind the after tax Net CF. Do I have to apply any givendepreciation here for both options (Make vs. Buy) just as usual?TIA

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