Capital Budgeting II Flashcards
what are the two tax effects in investments consideration
tax on operating cash flows
tax relief on investment spending (tax allowable depreciation)
when is tax paid
year after money earned
what tax affects profits
corporation tax
what is tax allowable depreciation
business cannot deduct cost of capital assets from its profit as depreciation
instead it is deducted as tax allowable depreciation
for what years an asset is owned is tax allowable depreciation claimed
every year except year of disposal
start claiming on first year
balancing amount given on disposal or clawback
what is total tax allowable depreciation relief equal to
cost of asset minus disposal value
what if there is a gain on disposal of the asset
owe tax money (capital gains tax)
what happens to working capital at the end of the project
released and treated as a cash inflow
is an increase in working capital a cash inflow or outflow
outflow
is a decrease in working capital a cash inflow or outflow
inflow
tax benefit of leasing
tax relief on rental payments
tax benefit of buying
tax savings from tax allowable depreciation
other considerations for choosing between leasing and buying
- who owns the asset at the end of the leasing period
- sometimes a restriction in terms of not having unlimited borrowing capacity, bank may not give loan or don’t want to use up all credit with bank
- benefits associated with lease eg maintenance covered in lease
what does EAC stand for
equivalent annual cost
choose projects with higher or lower EAC
lower
how to calc EAC
PV of cost / annuity factor
annuity factor formula
(1 - (1+r) ^ -n) / r
what is capital rationing
when there is not enough funding to fund every project
what is hard rationing
absolute limit on finance available imposed by bank/lender
what is a soft capital rationing
company itself imposes limits
eg limited management skills, so focus on two or three main projects
how to capital ration when it comes to divisible projects
calc PI
rank by PI
allocate funds according to ranking until they are used ip
what does it mean if projects are mutually exclusive
cannot be done togetehr
what is the difference between risk and uncertainty
risk is quantifiable and can be modelled
uncertainty isnt and cant
examples of aspects of project that are uncertain
project life
predicted cash flows
discount rate
what is sensitivity analysis
how much will changes effect
advanatges of sensitivity analysis
simple
identifies dangerous variables
disadvantages of sensitivity analysis
doesn’t tell you anything about how likely it is
ignores relationships among variables
doesn’t identify correct deciiosn
human biases made in capital budegting
naturally optimistic
hcokey stick
