2007 Cash Flow Review-1

2007 Cash Flow Review-1 - Cash Flow Review 1 A Tax Approach...

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1 Cash Flow Review
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2 A. Tax Approach: Time Zero Cash Flow = - Investment - Working Capital Time 1-N Cash Flow = Revenues - Operating Costs - Taxes (IRS) Taxes (IRS) = [Revenues - Operating Costs - Tax Depreciation] x Tax Rate Time N Additional Cash Flow = Salvage Value + Return of Working Capital + Tax on Disposition
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3 B. Net Income Approach (Book): Net Income = Revenues - Operating Costs - Book Depreciation - Taxes (Book) Taxes (Book) = [Revenues - Operating Costs - Book Depreciation] x Tax Rate Time Zero Cash Flow = - Investment - Working Capital Credit Time 1-N Cash Flow = Net Income + Book Depreciation + Deferred Taxes Deferred Taxes = [Tax Depreciation - Book Depreciation] x Tax Rate Time N Additional Cash Flow = Salvage Value + Working Capital + Tax on Disposition
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4 Example: Assume $10,000 Investment, 5-year straight line book depreciation. Tax Depreciation: $1,500; $2,200; $2,100; $2,100; $2,100 Revenues: $5,000/year Operating Costs: $1,000/year Tax Rate: 46%
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5 Tax Approach: = - Investment = -10,000
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2007 Cash Flow Review-1 - Cash Flow Review 1 A Tax Approach...

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