Ch8supp - Introduction CH.8 Supplementary note: CCA...

Info iconThis preview shows pages 1–6. Sign up to view the full content.

View Full Document Right Arrow Icon
Introduction CH.8 Supplementary note: CCA calculation JHT Kim October 23, 2009 1/16
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Introduction Measuring CF on an incremental basis Depreciation Motivation To evaluate a project, we need to compute NPV: PV ( Proj ) = X t =0 CF t (1 + r ) - t Determining CF t for each time t requires care. Some natural questions include: Can we use the estimated accounting incomes from the project as CF in the formula? for the project? What if the new project hurts the sale of existing product? 2/16
Background image of page 2
Introduction Measuring CF on an incremental basis Depreciation Incremental Cash Flows Matter 1 Cash flows matter, not accounting earnings (e.g., need to exclude depreciation) 2 Ignore sunk costs (i.e., if the cost has already been incurred, exclude it) 3 Opportunity costs matter. NPV > 0 should not guarantee automatic acceptance, particularly if you have to forgo another project with a higher NPV. 4 Side effects like erosion and synergy matter. If new product hurts existing product sales, we should recognize that fact 5 Taxes matter: we want incremental after-tax cash flows. 6 Inflation matters. 3/16
Background image of page 3

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Introduction Measuring CF on an incremental basis Depreciation Estimating Cash Flows How to convert accounting numbers and to actual cash flows CF t ? The CF t is the free CF (aka the financial CF) Recall that from Chap 2, FCF= Op. CF - CS - ΔNWC Operating Cash Flow = EBIT - Taxes + Depreciation Capital Spending: If equipment is bought or sold after its life, it creates CFs. e.g., (+)ve spending reduces the financial CF Change in NWC: when the project retires, net working capital decreases (-)ve ΔNWC or increase in the financial CF Depreciation is subject to the tax law and can be computed based on a CCA formula 4/16
Background image of page 4
Introduction Measuring CF on an incremental basis Depreciation Computing depreciation Capital Cost Allowance (CCA) is the depreciation amount for tax purposes prescribed by CRA has different rate by asset classes applies the half-year rule to the first year to reduce the incentive to buy assets at the end of the year to pay less tax reduces taxes and, thus, increases cash flow Example: Class 10 has 30% CCA rate (trucks, vans, and computer equipments are in this class). We illustrate the depreciation schedule for a new van bought at $24,000.
Background image of page 5

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Image of page 6
This is the end of the preview. Sign up to access the rest of the document.

Page1 / 16

Ch8supp - Introduction CH.8 Supplementary note: CCA...

This preview shows document pages 1 - 6. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online