Definition of "After-tax cash flow"
After-tax cash flow is a calculation method for companies’ financial performance to show their ability to generate cash flow through their operations. The after-tax cash flow formula works by adding costs that don’t include cash revenues (depreciation, restructuring costs, amortization, and impairments) to the company’s net income.
What is After-Tax Cash Flow and How it Works?
Through after-tax cash flow, investors can understand the impact taxes have on their profits. This calculation method determines the company’s cash flow for undertaking an investment or project. Because depreciation is a non-cash expense while not being actual cash outflow, it is added to the net income. This is because depreciation acts as a tax shield, even if it is an expense. The same happens to amortization and other non-cash expenses.
The After-Tax Cash Flow Formula:
After-Tax Cash Flow = Net income + Depreciation + Amortization + Other Non-Cash Expenses.
So if we have a project with an operating income of $1 million that has a depreciation value of $90,000, and the company running the project pays a tax rate of 35$, we get the net operating income through the following calculations:
- Firstly, we need to calculate the company’s earnings before taxes.
Earnings before taxes = Operating income - depreciated value
Earnings before taxes = $1 million - $90,000
Earnings before taxes = $910,000
- Secondly, with earnings before taxes, we can calculate the net income.
Net Income = Earnings before taxes - (Tax Rate x Earnings before taxes)
Net Income = $910,000 - (35% x $910,000)
Net Income = $910,000 - $318,500
Net Income = $591,500
- Finally, with the net income, we can use the after-tax cash flow formula to calculate.
After-Tax Cash Flow = Net Income + Depreciation + Other Non-Cash Expenses
After-Tax Cash Flow = $591,500 + $90,000
After-Tax Cash Flow = $681,500
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