Question

It is said that net cash flow is the same as economic profit. How is it? Explain your logic.

Answer 1

In order to understand the relationship between the net cash flow and the economic profit, let us first understand both the concepts. The difference between the reception of the revenue by way of selling the outputs of a particular product and the opportunity cost that was employed into the inputs of producing the same, is called as the Economic Profit. On the side, net cash flow is calculated by deriving the difference between the Company’s cash inflows and outflows during a given period. So basically, it is the net cash balance that is left after all the operating, investing and non-operating and other cash-related activities are taken care of. Therefore, if it is said that the net cash flow is the same as economic profit, that would mean that the net cash flow is the amount available after the payment of tax and operating expenses (NOPAT) less any operating expenses whereas Economic Profit would mean NOPAT-Capital charge or (ROIC-DR)*invested capital, i.e. the economic value that is generated upon the investment of the capital. As both the concepts take into consideration the investment in capital and hence different from the Traditional accounting profit measurements, it cn ge said that the net cash flow is the same as economic profit on the grounds of ‘investments’ or ‘opportunity costs’ involved in it.