Tax, Working Capital, Inflation DCF Flashcards
Two cash flows related to tax on corporate profits?
Tax payments (benefits) on operating profits (losses)
Tax benefits from tax allowable depreciation on capital expenditure
Corporate tax on profits treatment?
Will either be payable in same year as taxable profit are earned or in the next year
When tax allowable depreciation (TAD) is claimed?
Reduces the tax payment and is treated as a cash saving
How is TAD applied
On a straight line or reducing balance basis based on written down value of asset at start of the year
Zero disposal value in final year of asset’s TAD?
It reduces WDV of the asset to zero
What is the final TAD claim?
It is a balancing allowance and means that full capital cost of asset is claimed over asset’s useful life
What happens when asset is eventually sold?
Balancing allowance is based on WDV at start of year - disposal value obtained from sale of the asset
If scrap value > WDV at start of the year/
There is no TAD and the excess is taxed
Is TAD a cash flow?
No
Is tax saved due to TAD a cash flow?
Yes
How is cash saving on TAD calculated?
By multiplying the amount of TAD by the tax rate
If tax cash flows occur in year following the year in which item giving rise to tax occurs?
Cash flow for tax saving from TAD will occur in year following the year in which allowance is claimed
When taxation is ignored in DCF?
Discount rate will reflect pre-tax rate of return required on capital investments
When taxation is included in cash flows?
A post-tax required rate of return should be used
An increase in working capital and cash flow?
Causes a cash outflow
