During the construction phase, some of the items of expenditure are capitalized while some of them are expended immediately. The capitalized items are not considered for tax purpose immediately but are recognised as a pre-specified series of expenses at various times in future. The expenditure incurred towards construction of the project facility, i.e. EPC cost, is normally capitalised and then depreciated against revenues.
Net cash expenditure = − Ic − (1 − τ) Ec
Where, Ic = Expenditures which have been capitalised
Ec = Expenditures which have been expensed immediately
In case of brown-field project, the existing project asset will be structured along with the expansion of the existing facility and hence the existing facility will generate revenue during the construction phase. The net revenue generated from the operation of the existing facility will also be counted towards the after-tax cash flows during the construction phase.
Net cash flow from operation of ancillary facility = (1 − τ)(S − B)
Where, S = Revenue from operation of ancillary facility
B = Expenditure in operating the ancillary facility
Net working capital is the amount of financing required to cover working capital in order to maintain operations at the planned level. Financing is required to make investment in current assets such as inventories, receivables, and other short-term assets. And, part of the financing is also needed to offset with current liabilities.
Therefore, the after-tax cash flow during the construction is the summation of net cash expenditure, net cash flow from operation of ancillary facility, net working capital along with investment tax credit.
After-tax cash flow during construction phase = − Ic − (1 − τ) Ec − W + (1 − τ)(S − B) + C
Where, W = Net working capital
C = Investment tax credit