Is Depreciation Considered When Calculating NPV?

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Net present value allows you to estimate the present value of a project based on expected future cash flows. Cash flows are based on the money that you expect to receive as income and that you expect to pay as expenses. You also need to factor in depreciation when calculating your cash flows.

Including Depreciation

Depreciation refers to the decline in value of an asset. For example, if you purchase a piece of equipment for $10,000, and it has an expected useful life of 10 years, it would depreciate by $1,000 per year using straight-line depreciation. Depreciation is not an actual cash expense that you pay, but it does affect the net income of a business and must be included in your cash flows when calculating NPV. Simply subtract the value of the depreciation from your cash flow for each period. For example, if you have a cash flow of $15,000 for a period and depreciation of $1,000 for the same period, your actual cash flow should be $14,000.

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