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? (approximately 200 words)

Answer 1

At the time of Financing a new project it is essential to consider the tax impact because the same will impact the decision making. Firstly we need to consider the after tax returns from a new project to know the actual Returns. Secondly for comparing different projects we need to know the cost of capital. This is the opportunity cost of the funds invested in a new project. Cost of capital is calculated as the weighted average cost of different sources of funds used by the business. We consider the after tax cost of debt in the calculations because interest payment on debt is tax deductible. Usage of debt reduces the cost of capital and makes different projects more attractive.

In Personal Finance there are different options available for investing for retirement. In retirement plans there need to be careful consideration before making the investment. If the contributions are made from after tax income it will not be taxed at the time of payments. However if contributions are made from pre tax income the payments will become taxable. The investor needs to consider the timing of tax payments and his immediate needs to make the right choice. He needs to consider whether deferring the tax payments is better than paying the taxes immediately.