If you add depreciation and amortization to incremental net operating profits after tax (NOPAT), then you will obtain incremental cash flow from operations.

Question

Quizplus · Accepted Answer

Depreciation and amortization are non-cash expenses, meaning that they do not involve actual cash outflows. Therefore, by adding back these expenses to NOPAT, we are essentially removing their non-cash impact and arriving at the cash-based incremental net operating profits. This, in turn, gives us the incremental cash flow from operations, which takes into account any changes in cash flows resulting from the business's growth or investment activities.

If You Add Depreciation and Amortization to Incremental Net Operating