The capital cash flow (CCF) calculation method increases after-tax cash flows by decreasing taxable income. To do this, CCF includes interest tax shields where a tax deduction is counted as a positive cash flow. The CCF method is often preferred when calculating high-risk cash flows such as investments. In these situations, forecasting debt levels is favored as opposed to forecasting debt percentages when determining business asset values.
Calculate your earnings before interest and taxes (EBIT). The EBIT is also referred to as operating income.
Add the depreciation expense and then subtract capital expenditures.
Subtract investments in net working capital (NWC).
Add the interest tax shield. This figure is your allowable deduction from taxable income. For example, debt interest and your depreciation expense are taxable deductions and, therefore, tax shields. In accounting, these calculations are referred to in general terms as making cash flow adjustments.
Tip
Define and itemize your interest tax shields prior to calculating capital cash flow. Mortgage interest is an interest tax shield because, typically, interest on mortgage is tax deductible; however, dividends are not. Therefore, a dividend that is paid on equity is non-tax deductible and cannot be added as an interest tax shield.
