S9 - NPV

Question 1

What are the relevants CFs? The irrelevants CFS?

Answer 1

Relevant:
- CFs
- Opportunity cost
- Incremental CFs (related to the project)
- Working capital

Irrelevant:
- Accounting items
- Interest and principal repayment
- Sunk costs
- Financing costs

Question 2

What do corporate tax for?

Answer 2

1. Revenues and expenses
   - called non-capitalized expenses
2. Assets
   - no tax impact when purchasing
   When you sell an asset…
   2.1 If it was depreciated:
   - remove PVSLTS
   - If selling value > buying price: pay taxes on capital gains
   2.2 If the asset was not depreciated
   - If selling value > buying price: pay taxes on CG
   - If selling value < buying price: get tax credit on CL
3. The case of depreciation
   - Depreciation has CF consequences only because it influences the tax bill -> allows for tax deduction and then this CF should be included in NPV calculation

Question 3

What are the two types of expenditures?

Answer 3

1. Non-capitalized expenses
   - Ordinary/current operation expenses
   - Tax deductible expenses D* = D(1-tm)
   - Ex.: salaries, commissions
2. Capitalized expenses
   - Non-tax deductible but depreciable expense
   - PVCCATS and PVSLTS
   - Ex.: major equipment or major machine repairs/renovations. Add value to the assets.