In the discounted cash flow model, you added depreciation to the net income to derive operational cash flow. Why is depreciation added to the cash flow?\ \ Note, more than one answer may be correct.\ \ \ When calculating net income in the pro-forma statement, depreciation is deducted. So, when calculating cash flow, we need to add it back in.\ \ \ Depreciation costs are not tax-deductible and therefore need to be added after income taxes are calculated.\ \ \ Although depreciation is not paid in cash, the investment linked to the depreciation was paid in cash and must therefore be accounted for.