By Don Dayanada; et al
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Additional resources for Capital budgeting : financial appraisal of investment projects
E. the depreciation tax shield, or the reduction in taxes attributable to the depreciation allowance. If it were not a tax deduction we would not consider it within an NPV evaluation. Three ways of calculating the tax shield of allowable depreciation are presented in a later section of this chapter. 20 Capital Budgeting Tax payable Tax payable is a cash outflow. The form of tax encountered in project analysis is corporate tax. It is calculated as a percentage of taxable income. The rate of corporate tax is usually a fixed rate for every dollar of taxable income.
This category of decision also encompasses asset retirement, asset abandonment and asset replication over the longer term. 14 Capital Budgeting In projects generally, the relevant cash flows will be easy to identify. These will be the straightforward amounts for the initial outlay, ongoing receipts of cash from sales, ongoing cash expenditures on production costs and individual asset termination flows. However, there are some cash flows that are not so straightforward, and are sometimes difficult to identify.
Proposal’s incremental cash inflows ((1) − (2)) at the end of 2003 is included as a terminal cash outflow as it represents an opportunity cost. That is, the old machine’s sale proceeds of $3,500 (which would have been a terminal cash inflow ‘without’ the proposed project) are now lost ‘with’ the proposed project. Therefore, that amount is attributed as a cash outflow for the proposed replacement project. 5. 6. Repco Replacement Investment Project: overall cash flow ($) EOY 0 Initial investment Terminal cash flow Operating cash flows −112,400 Total cash flow −112,400 EOY 1 EOY 2 EOY 3 50,800 60,550 20,375 56,800 50,800 60,550 77,175 The two capital flow components – the initial investment and the terminal cash flow – and the operating cash flow component represent a project’s overall cash flows.
Capital budgeting : financial appraisal of investment projects by Don Dayanada; et al