Don't understand the idea behind the formulas


Don't understand the idea behind the formulas

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bonfire
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In the HW, I can understand the item (4) is just used to figure out tax, then tax becomes a real component of the cash flow.

I feel there are four real components in the cash flow for the NPV calculation: the initial investment (-40 M), yearly revenue, yearly variable cost, yearly fixed cost, yearly tax (which corresponds to item 6).

The way to calculate item (8) doesn't make sense to me. According to the HW,

(8) = (7) + (4) = (5) -(6) + (4) =  0.65* ( (1) - (2) -(3) -(4) ) + (4)

     = 0.65 * ( (1)  - (2) - (3) ) + 0.35 * (4)

To my understanding, the net cash flow (8) should be:

(8) = (1) - (2) - (3) - (6)

Then the NPV = -40 M + (8)/1.1 + ... + (8)/1.1^8

[NEAS: See the dialogue on the intuition for the depreciation tax credit.]


Edited 6 Years Ago by NEAS
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