# Net Operating Profit After Taxes

NOPAT (which stands for net operating profit after taxes) approximates after-tax cash flows of a company under the assumption that the company is not able to claim the tax advantage of its debt. It is an important input in the estimation of free cash flows (FCF) and economic value added (EVA).

Free cash flow to firm (FCFF) equals NOPAT minus net investment in operating working capital.

Economic value added equals NOPAT minus cost of invested capital.

## Formula

NOPAT = Operating Income × (1 − Tax Rate)

Earnings before interest and taxes (EBIT) equals operating income in most cases.

NOPAT = EBIT × (1 − Tax Rate)

It can also be calculated as:

NOPAT

= Net Income + Net After-Tax Interest Expense

= Net Income + (Interest Expense − Interest Income) × (1 − Tax Rate)

## Example

ADX has earnings before interest and taxes of $424 million and net interest expense of $32 million. If the relevant tax rate is 35% and net income is $255 million, find NOPAT starting from (a) EBIT and (b) net income.

__Solution__

NOPAT (from EBIT)

= $424 million × (1 − 35%)

= $276 million

NOPAT (from net income)

= $255 million + $32 million × (1 − 35%)

= $276 million

Written by Obaidullah Jan, ACA, CFA