BECLectureSeriesRiskManagementandCapitalBudgetingAICPA东方华尔.pptVIP

Calculation: Pre-tax and After-tax Cash Flow After-Tax Cash Flows: Income taxes are deducted in estimating annual cash flows and are computed as follows: Estimate income taxes related to a projects income (or loss) for each year of the projects useful life. Compute the estimated cash flows prior to consideration of taxes. The tax savings or expense related to a particular cash flow equals the amount of the expense or income times the firms marginal income tax rate. Working capital is not taxed when computing tax expenses on cash flows. Factors that Affect Income Taxes and Cash Flows, Asset Disposition When assets are abandoned, sold, or traded-in as a result of a new asset acquisition, immediate income tax effects result The increase or decrease in income taxes paid at that time causes an increase or decrease in the cash outlay related to the acquisition. . Asset Abandonment  The net salvage value is treated as a reduction of the initial investment in the new asset. The abandoned assets book value is considered a sunk cost, and not relevant to the decision-making process. The remaining book value (for tax purposes) is deductible as a tax loss, which reduces the liability in the year of abandonment. This tax liability decrease is a reduction of the new assets initial investment. Asset Sale If new asset acquisition requires the sale of old assets, the subsequent gain or loss has no effect on the capital expenditure decision because the book value of the old asset is a sunk cost. The cash received from the sale of the old asset reduces the new investments value. If a gain or loss (for tax purposes) exists, there is also a corresponding increase or decrease in income taxes. The amount of income tax paid on a gain on a sale is treated as a reduction of the sales price (which increases the initial expenditure). Conversely, a reduction in tax resulting from a loss on sale is treated as a reduction of the new investment Asset Trade-In Generally, no gain