Doubts

Depreciation in Operational Cash-Flows

Depreciation in Operational Cash-Flows

by Sofia Lampreia Alves Garcia -
Number of replies: 2

Dear Julio,

I hope you're doing well.

I know you explained this in class today, but I'm still struggling to fully understand why depreciation is subtracted when calculating EBIT and then added back when calculating operational cash-flows. What’s the point of this double treatment?

Thank you in advance for your help!

Best regards,
Sofia


In reply to Sofia Lampreia Alves Garcia

Re: Depreciation in Operational Cash-Flows

by Steffen Maxim Hübener -

Hello Julio,

Maybe to adding to that: I think it’s because this double treatment matters—it ensures the tax effect in EBIT (1-t) is accurate. Without removing depreciation first, the tax calculation would be incorrect.

Is this a sufficient explanation?

In reply to Steffen Maxim Hübener

Re: Depreciation in Operational Cash-Flows

by Julio Crego -
You are correct.

We subtract the depreciation to compute the EBT because the tax is applied to the EBT. Once we have correctly computed the tax we need to sum it up because depreciation is not a cashflow (money does not change hands)