When cash flow projections are very uncertain the

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Unformatted text preview: ections are very uncertain, the accountant may . . . 1. increase the hurdle rate, 2. use sensitivity analysis. 16-23 Postaudit of Investment Projects Postaudit A postaudit is a follow-up after the project has been approved to see whether or not expected results are actually realized. 16-24 Income Taxes and Capital Budgeting Budgeting Cash flows from an investment proposal affect the company’s profit and its income tax liability. Income = Revenue - Expenses + Gains - Losses Income = Revenue - Expenses + Gains - Losses 16-25 After-Tax Cash Flows After-Tax High Country Department Stores Income Statement For the Year Ended Jun 30, 2007 Revenue $ 1,000,000 Expenses Income before taxes Income taxes Net Income (475,000) 525,000 (210,000) 315,000 The tax rate is 40%, so income taxes are The tax rate is 40%, so income taxes are $525,000 × 40% = $ 210,000 $525,000 × 40% = $ 210,000 Not all expenses require cash outflows. The most common example is depreciation. Not all expenses require cash outflows. The most common example is depreciation. 16-26 Modified Accelerated Cost Recovery System (MACRS) Recovery Tax depreciation is usually computed using MACRS. Here are the depreciation rate for 3, 5, and 7-year class life assets. 16-27 Investment in Working Capital Investment Some investment proposals require additional outlays for working capital such as increases in cash, accounts receivable, and inventory. 16-28 Extended Illustration Extended For a complete present value analysis for an For a complete present value analysis for an iinvestment decision facing High Country nvestment decision facing High Country Department Stores, Inc., see the textbook. Department Stores, Inc., see the textbook. High Country Department Stores 16-29 Ranking Investment Projects Ranking We can invest in either of these projects. Use a 10% discount rate to determine the net present value of the cash flows. Project A Immediate cash outlay $ 100,000 Cash inflows: Year 1 $ 50,000 Year 2 40,000 Year 3 30,000 Total inflows $ 120,000 Project B $ 100,000 $ 30,000 40,000 50,000 $ 120,000 The total cash flows are the same, but the pattern of the flows is different. the 16-30 Ranking Investment Proje...
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