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Unformatted text preview: nt. Because we assume that taxes are a percentage of net income, the tax
on these period cash inflows will be:
(amount of the cash inflow) * (tax rate)
The firm will keep what’s left after paying taxes, so the after tax cash inflow will be:
(amount of the cash inflow) * (1- tax rate) Residual Value
Residual value is the amount of the asset’s cost that is not depreciated by the end of the project’s
life. When the firm is estimating residual value at the beginning of an asset’s life, the amount is
the firm’s best guess of the asset’s value when the project is complete.
Recall that federal income tax is imposed on net income. When assets are sold, both the revenue
from the sale of the asset and the asset’s cost appear on the income statement.
When assets are sold at cost, revenue and expense are equal, so there is zero net incom...
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This note was uploaded on 09/29/2011 for the course 06A 002 taught by Professor Stuff during the Spring '11 term at University of Iowa.
- Spring '11