Relevant Cash Flows Flashcards
When can cash inflows and outflows be included?
In only future, incremental cash flows
What are incremental cash flows?
Change because a project is undertake
An example of incremental cash flows?
Cash from sales - operating costs (materials and labours)
Why are financing cash flows not included?
As the cost of finance is measured in the cost of capital/discount rate
What costs are excluded from cash flows?
Sunk costs
Non-cash costs
Book values
Unavoidable costs
FInance costs
Example of sunk costs?
Money already spent
Example of non-cash costs?
Depreciation
Example of book values?
FIFO/LIFO
Example of unavoidable costs?
Money already committed and apportioned fixed costs
Example of finance costs?
Interest
What is lost contribution?
An opportunity cost and should be shown as a cash outflow
What is included?
All opportunity costs and revenues
Costs to date and what has just been purchased?
Not included as sunk
Sales value of a project?
Included
Negative effect on tax system for cash flows?
It is charged on operating results
Positive effect on tax system for cash flows?
Tax relief is given on non-current assets via tax-allowable depreciation (TAD).
What is the operating results?
Revenues less operating costs (materials, labour and overheads)
What happens with tax relief on finance costs?
Taken into account in the discount rate
What is financial accounting depreciation?
It is not a tax-allowable expense.
Instead business may claim tax-allowable depreciation
What is the difference between tax written-down value and disposal proceeds
Tax allowable loss or taxable gain
What are all negative cash flows associated with a project?
They are assumed to attract tax relief
Revenue expenditure and tax?
Reduces taxable profit
Capital expenditure and tax?
Attracts tax-allowable depreciation
What is the sufficient taxable profits assumption?
If the net cash flow for a year is negative. there will be a positive tax cash flow in respect of the tax relief
Tax discount project appraisal?
Forecast the post-tax cash flows from the project AND discount at the stated discount rate
When are a company’s investors only entitled to a project’s cash flow?
After corporation tax has been paid
How to calculate pre-tax cash flow?
Post-tax cash flow/(1 − Corporate tax rate)
How to calculate pre-tax discount rate?
Post-tax discount rate/(1 − Corporate tax rate)
Why does pre-tax cash flow rarely equal post-tax cash flow?
Significant timing differences between cash flows and taxable profits
