## Cash Flow Estimation Principles
### G. Exclusion of Financing Costs Principle
When defining cash flows relating to long-term funds, financing costs of long-term funds must be excluded from the analysis. These costs are:
- Interest on long-term debt
- Equity dividends
Why? Interest and dividend payments are already captured in the Weighted Average Cost of Capital (WACC), which is the discount rate. If you also deduct them while computing the cash flows, the cost of long-term funds is counted twice.
In practice this means:
- Interest on long-term debt is ignored while computing profits and taxes.
- Expected dividends are irrelevant to cash flow analysis.
### H. Post-tax Principle
Cash flows must be defined in post-tax terms - tax payments, like any other payment, must be deducted.
> Both the cash flows and the discount rate must be post-tax. Never mix a pre-tax rate with post-tax flows.
### Computing Cash Inflow After Tax (CFAT)
```
Sales value
Less: Variable Cost
= Contribution
Less: Fixed Cost
(a) Fixed Cash Cost (excluding Interest)
(b) Depreciation
= Earning Before Tax (EBT)
Less: Tax
= Earning After Tax (EAT)
Add: Depreciation
= Cash Inflow After Tax (CFAT)
```
Depreciation is deducted to capture the tax shield, then added back because it is a non-cash item.