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These claims depend on the firms taxable income so

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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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