8 should we accept or reject the project 11 11 more

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Unformatted text preview: we have to consider changes in NWC Why separately? separately? GAAP requires that sales be recorded on the income GAAP statement when made, not when cash is received statement GAAP also requires that we record cost of goods sold GAAP when the corresponding sales are made, whether we have actually paid our suppliers yet have Finally, we have to buy inventory to support sales Finally, although we haven’t collected cash yet although 12 12 Depreciation The depreciation expense used for capital The budgeting should be the depreciation schedule required by the IRS for tax purposes required Depreciation itself is a non-cash expense; Depreciation consequently, it is only relevant because it affects taxes affects Depreciation tax shield = DT D = depreciation expense T = marginal tax rate 13 13 Computing Depreciation Straight-line depreciation D = (Initial cost – salvage) / number of years Very few assets are depreciated straight-line for tax Very purposes purposes MACRS Need to know which asset class is appropriate for Need tax purposes tax Multiply percentage given in table by the initial cost Depreciate to zero Mid-year convention 14 14 After-tax Salvage If the salvage value is different from the If book value of the asset, then there is a tax effect effect Book value = initial cost – accumulated Book depreciation depreciation After-tax salvage = salvage – T(salvage – After-tax book value) book 15 15 Example: Depreciation and Aftertax Salvage You purchase equip...
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This document was uploaded on 03/01/2014 for the course FINANCE 250 at Indiana.

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