Question

Why is it important to consider the consequences of taxes when financing a new project? Can you think of a situation in your own personal finances where taxes might influence whether you choose to make a purchase?

Answer 1

It is very important to consider the consequence of Texas because there are various types of financing which will be offering with tax deduction and there are other types of financing which will not be offering with the tax deduction, so it will be overall formulating into the cost of capital and hence the financing manager should always be trying to incorporate the effect of taxes before making any financing decisions.

Financing a new project debt capital will offer with tax deduction on the interest payment because interest are tax deductible and they are offered with the interest tax shield so the finance manager should be considering the after-tax effect of cost of debt, because the cost of debt are generally lower due to interest tax deduction than the cost of equity as equity payments in form of dividend and capital gains are not exempt in nature and dividend have double taxability in few corporations so the overall implications of cost of capital should be considered after incorporation of the effect of taxes before making a financing decision.

In India, When we are purchasing homes then if we are taking loans and loans from a specified government organisations, then if we are paying the interest on that loan and interest will be deductible when we are computing our overall taxable income, so we will always be trying to specify various advantages regarding taxation effect into our overall taxable income and then we will determine the sources of capital to finance a project or sources of capital to purchase an asset.