Unformatted text preview: ny benefits until it
has satisfied the government’s tax claims. These claims depend on the firm’s taxable income, so deducting taxes before making comparisons between proposed
investments is necessary for consistency when evaluating capital expenditure
alternatives. Interpreting the Term Cash Inflows
All benefits expected from a proposed project must be measured on a cash flow
basis. Cash inflows represent dollars that can be spent, not merely “accounting
profits.” A simple accounting technique for converting after-tax net profits into
operating cash inflows was given in Equation 3.1 on page 102. The basic calculation requires adding depreciation and any other noncash charges (amortization
and depletion) deducted as expenses on the firm’s income statement back to net
profits after taxes. Because depreciation is commonly found on income statements, it is the only noncash charge we consider.
EXAMPLE Powell Corporation’s estimates of its revenue and expenses (excluding depreciation), with and without the...
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