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Net Income Versus Cash Flow: Lecture No.24 Professor C. S. Park Fundamentals of Engineering Economics

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31 views

Net Income Versus Cash Flow: Lecture No.24 Professor C. S. Park Fundamentals of Engineering Economics

Uploaded by

Nivika Tiffany
Copyright
© © All Rights Reserved
Available Formats
Download as PPT, PDF, TXT or read online on Scribd
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Net Income Versus Cash

Flow

Lecture No.24
Professor C. S. Park
Fundamentals of Engineering Economics
Copyright © 2005
Taxable Income and Income Taxes
Item

Gross Income
Expenses
Cost of goods sold (revenues)
Depreciation
Operating expenses
Taxable income
Income taxes

Net income
Example 8.8- Net Income Calculation

Item Amount
Gross income (revenue) $50,000
Expenses
Cost of goods sold 20,000
Depreciation 4,000
Operating expenses 6,000
Taxable income 20,000
Taxes (40%) 8,000
Net income $12,000
Capital Expenditure versus Depreciation Expenses

1 2 3 4 5 6 7 8
0

Capital expenditure
$28,000 (actual cash flow)

0 1 2 3 4 7 6 7 8

$1,250
$3,500 $2,500 $2,500 $2,500
$4,000 $4,900
$6,850 Allowed depreciation expenses (not cash flow)
Cash Flow vs. Net Income
Net income: Net income is an accounting means of
measuring a firm’s profitability based
on the matching concept. Costs become
expenses as they are matched against
revenue. The actual timing of cash inflows
and outflows are ignored.

Cash flow: Considering the time value of money, it is better


to receive cash now than later, because cash
can be invested to earn more money. So,
cash flows are more relevant data to use in
project evaluation.
Why Do We Use Cash Flow in Project
Evaluation?

Example: Both companies (A & B) have the same amount of


net income and cash sum over 2 years, but Company A returns
$1 million cash yearly, while Company B returns $2 million
at the end of 2nd year. Company A can invest $1 million in year
1, while Company B has nothing to invest during the same period.

Company A Company B
Year 1 Net income $1,000,000 $1,000,000
Cash flow 1,000,000 0
Year 2 Net income 1,000,000 1,000,000
Cash flow 1,000,000 2,000,000
Example 8.9 – Cash Flow versus Net Income

Item Income Cash Flow


Gross income (revenue $50,000 $50,000
Expenses
Cost of goods sold 20,000 -20,000
Depreciation 4,000
Operating expenses 6,000 -6,000
Taxable income 20,000
Taxes (40%) 8,000 -8,000
Net income $12,000
Net cash flow $16,000
Net income versus net cash flow

Net cash flows = Net income + non-cash expense (depreciation)

$50,000
Net Net income $12,000
$40,000 cash flow
Depreciation $4,000

$30,000 Income taxes $8,000


Gross
$6,000 revenue
Operating expenses
$20,000

$10,000 $20,000
Cost of goods sold

$0

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