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
A decrease in working capital and cash flow?
Causes a cash inflow
Investmetn in working capital at begining of period inflow or outflow?
Cash outflow
Working capital released at end of project’s life?
A cash inflow arising out of eventual realisation into cash of project’s inventory/receivables
What is real in inflation?
Based on current price levels
What is nominal in inflation?
After adjusting for impact of expected inflation
When cash flow rises?
Makes the project more attractive
When discount factor rises?
Makes project less attractive
When present value rises?
NPV impact may be minimal
If there is one rate of inflation?
Inflation has no net impact on project’s NPV
Why does one rate of inflation have no impact on NPV
An increase in prices on inflows is exactly offset by impact of inflation on increasing cost of capital
Ignoring inflation?
Links to real cash flows
If there is more than one rate of inflation?
Inflation will have an impact on profit margins and inflation must be included
What does noiminal interest rate incorporate?
Inflation
Real cash flows when there’s more than one rate of inflation?
Must adjust nominal cash flows as there are multiple rates of inflation
If sales and purchases are inflated
Receivables, payables and inventory are also inflated
