Question

In: Finance

Your Discussion should be a minimum of 250 words in length and not more than 450...

Your Discussion should be a minimum of 250 words in length and not more than 450 words. Please include a word count. Following the APA standard, use references and in-text citations for the textbook and any other sources.

For this week's discussion assignment, refer to the Heisinger & Hoyle (2012) resource, The Effect of Income Taxes on Capital Budgeting Decisions.

  • Describe and explain capital budgeting items that may or may not be taxed as part of a capital budget project.

Solutions

Expert Solution

Answer

Income tax makes a difference in many capital budgeting decisions. The project that is attractive on a before tax basis may have to be rejected on an after tax basis. Income tax typically effect both amount of cash flow and timing of cash flow. Since net income (not cash inflows ) is subjected to tax , after tax cash inflows are not usually same as after tax net income.

Let us understand with formula :

S= sales

E= cash operating expenses

D= depreciation

T= tax

Then before tax cash inflows are: S-E-D

Now see the cash inflows after tax : (S-E)(1-T)+D(T)

Some of the items which effect capital budgeting decisions while taking tax into consideration

DEPRECIATION

From the above it is observed that deductibility of depreciation from sales is subjected to tax shield , because as per income tax depreciation allowed as deduction form income . so tax on depreciation is the savings from tax payment. the more the depreciation the more the savings from tax payment.

Let us understand with example:

S= 10000

E= 5000

D=2000

T=30%

Now calculate the net operating income before taking tax into consideration

Net operating income= 10000-5000-2000=3000

Now calculate the net operating income after taking tax into consideration

Net operating income=(10000-5000)(1-0.3%)+ tax shield on depreciation

Tax shield on depreciation is = 2000*30%=600

So net operating income is =3500+600=4100

From the above it is observed that after taking tax into consideration net operating income increases by 1100, since depreciation is as expense which is having tax implication as saving so operating income increases by 1100

INTEREST PAYMENT ON BORROWING

One of the other items which effect capital budgeting decisions while taking tax into consideration is interest. Interest is a finance expense on which we can gain tax shield at the rate of income tax, so interest expenses will give us tax savings which increases net operating income

CAPITAL GAIN OR LOSS ON SALES OF FIXED ASSETS

sale of fixed asset will create capital gain or loss , this gain or loss will have tax implications , If it is gain net operating income will decrease because gain attracts taxes to be paid, if it is loss net operating income will increase because loss gives us tax shield.

So from the above discussion it can be understand that income tax will effect the capital budgeting decisions


Related Solutions

Your Discussion should be a minimum of 250 words in length and not more than 450...
Your Discussion should be a minimum of 250 words in length and not more than 450 words. Please include a word count. Following the APA standard, use references and in-text citations for the textbook and any other sources. For this week's Discussion: Discuss the impact of depreciation expense on the cash flow analysis of a capital project. Also, discuss the types of leasing arrangements and their pros and cons relating to depreciation expense.
The Portfolio entry should be a minimum of 250 words and not more than 750 words....
The Portfolio entry should be a minimum of 250 words and not more than 750 words. Use APA citations and references if you use ideas from the readings or other sources. For this week’s portfolio activity, please advise the instructor of the following: 1. Utilizing the information provided in your course textbook(s) or other valid sources, briefly compare the coupon rate and the interest rate regarding bonds. What is a par value? 2. Describe the impact of a tax shield...
The Portfolio entry should be a minimum of 250 words and not more than 750 words....
The Portfolio entry should be a minimum of 250 words and not more than 750 words. Use APA citations and references if you use ideas from the readings or other sources. For this week’s portfolio activity, please advise the instructor of the following: Utilizing the information provided in your course textbook(s) or other valid sources, briefly explain why company valuation is influenced by capital structure decisions. Please provide a brief update to the instructor on how you feel you are...
The Portfolio entry should be a minimum of 250 words and not more than 750 words....
The Portfolio entry should be a minimum of 250 words and not more than 750 words. Use APA citations and references if you use ideas from the readings or other sources. For this week’s portfolio activity, please advise the instructor of the following: Utilizing the information provided in your course textbook(s) or other valid sources, describe the role of the Financial Manager. In addition, explain the functions of money.
It should be a minimum of 450 words or else do not answer the question. Do...
It should be a minimum of 450 words or else do not answer the question. Do not plagiarize or paste any other answer from chegg!! 1. Reflect on the concept of polynomial and rational functions. 2. What concepts (only the names) did you need to accommodate these concepts in your mind? 3. What are the simplest polynomial and rational function you can imagine? 4. In your day to day, is there any occurring fact that can be interpreted as polynomial...
Your Discussion should be a minimum of 400 words. A manufacturing company that publishes it's its...
Your Discussion should be a minimum of 400 words. A manufacturing company that publishes it's its financial information: I chose Microsoft Corporation. Describe the specific manufacturing costs it incurs, Categorize each cost into the three manufacturing cost categories, and state if the costs are variable, fixed, or mixed. Explain how you came to your conclusions. Please Note: Please do not plagiarize Please do not send an image, please type.
Discussion Topic: Minimum 250 words, Questions are on the bottom and are in bold letters. Mr....
Discussion Topic: Minimum 250 words, Questions are on the bottom and are in bold letters. Mr. Antieau, 47 years of age, was playing basketball in a driveway with friends one summer evening when he suddenly felt nauseated and light-headed. “I sat out a few on the porch, thinking things would get better,” he says, “but then I got a sharp pain in my chest and shoulder.” This pain, predictably, became severe enough that his friends rushed Mr. Antieau to the...
Your work should be in the range of 150-250 words. For all discussion questions, you must...
Your work should be in the range of 150-250 words. For all discussion questions, you must cite to your text or some other reliable source when answering the question. What concepts are you applying? Where are you getting the information? Scenario (based on a real Illinois case): A patient presented to a local emergency room and was examined by a plastic surgeon. A review of an X-ray taken of the patient's knee revealed a possible malignant neoplasm. Consequently, the plastic...
Should US consumers increase spending by more than the increase in personal income? (Minimum 100 words)
Should US consumers increase spending by more than the increase in personal income? (Minimum 100 words)
Leadership Discussion Topic: "Being Clear" ( minimum of 250 words) You are working on a small...
Leadership Discussion Topic: "Being Clear" ( minimum of 250 words) You are working on a small medical admissions unit and have asked a nursing assistant to perform vital signs and do the observations. She takes the temperature, pulse, saturation, pain level, and blood pressure of every patient on the unit, as asked. Approximately one hour later you ask if all the observations were OK. The nursing assistant replies that the patient in Room 9A had a temperature of 39* Celsius....
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT