Construct the project cash account

Start with the decision the corporation can still change. A past irrecoverable study cost cancels from the comparison. Its future tax effect also cancels if both alternatives obtain it; retain a refund, deduction or other future consequence that differs. An allocated overhead cancels only when taking the project leaves the actual resource commitment unchanged. For cannibalized business, subtract the contribution lost after avoided costs, not automatically its gross revenue. For a resource with another feasible use, include the cash forgone under that use. A with/without projection already containing that loss needs no second opportunity-cost charge.

A compact bridge is available when the account’s only noncash charge is depreciation and the relevant taxable income is taxed at a fully usable rate τ in the same period:

FCF_t = (R_t − C_t − Dep_t) × (1−τ) + Dep_t − Capex_t − (NWC_t − NWC_(t−1)).

Apply it to each alternative and subtract their resulting flows. R and C are period revenue and operating cost before depreciation, Dep is the tax depreciation used in this simplified account, and Capex is the dated capital payment. NWC is the operating receivables and inventory less operating payables used in the projection; cash, debt and tax balances are outside this bridge. Its change is over time within one alternative, distinct from the comparison between alternatives. If other operating balances matter, include their cash effects explicitly.

Depreciation reduces the tax base but is added back because it is not another payment for the asset. If tax depreciation, deductible costs, losses or payment dates differ from the shortcut’s assumptions, replace the formula’s tax charge with the actual unlevered cash-tax schedule. Obtain the applicable tax treatment and use deductions only when the corporation can realize them. Capital and working-capital payments occur when needed, including before operations begin. A direct receipt/payment forecast that already includes collections and supplier settlements needs no additional working-capital subtraction.

At a finite ending, estimate realizable asset-sale proceeds, their taxes, recoverable working capital, and closure payments. Include only recovery supported by the runoff: an uncollectible receivable is not a terminal receipt. If the activity continues, its continuing value needs the investment and working capital that sustain it. Do not also liquidate those same continuing assets in a separate terminal inflow.