p_eval4_l13_tax

p_eval4_l13_tax - 1.011 Project Evaluation TAXES &...

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1.011 Project Evaluation TAXES & DEPRECIATION C.D. Martland 1. Depreciation 2. Taxes 3. After-tax cash flows
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Why Worry About Taxes & Depreciation? Income taxes are large cash flows that cannot be ignored Tax credits and depreciation rules are sometimes used to encourage investments and we need to understand how that works Depreciation is a non-cash expense that results in reduced tax payments After tax results are most meaningful to companies
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A VERY General Perspective Gross Income (i.e. Revenue) - Expenses - Depreciation = Taxable Income (Net Income Before Taxes) - Income Tax = Net Income After Taxes (i.e. Profit) ROI = Net Income After Tax/(Invest-Deprec) Accounting rules and tax law determine exactly how depreciation and taxes affect cash flows.
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Depreciation Is an Accounting Mechanism to Transform Investment into Annual Expenses Investment is a CASH FLOW but not an EXPENSE "Expenses" are, in accounting terms, amounts that can be deducted from current income to calculate profit Investments simply transform financial assets into another type of capital asset After making an investment, you presumably have the same capital value you started with Depreciation is an EXPENSE but not a CASH FLOW Depreciation is an ACCOUNTING means of reflecting the consumption of a capital asset as it is used
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Possible Ways to View Depreciation An Engineering Estimate of the decline in
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This note was uploaded on 11/29/2011 for the course CIVIL 1.00 taught by Professor Georgekocur during the Spring '05 term at MIT.

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p_eval4_l13_tax - 1.011 Project Evaluation TAXES &...

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