Depreciation and Income Taxes - After-tax economic analyses

4 important questions on Depreciation and Income Taxes - After-tax economic analyses

What is an assumption in the taxation of cash flows?

All cash flows keep in the model as without taxation. The only adjustment for depreciation, which is a cost hence it is not a real cash flow.

Give the general procedure for making after-tax economic analyses;

Rk | Revenues (and savings) from the project, cash inflow period k;

Ek | Cash outflows year k for deductible expenses;

dk | Sum of all noncash or book costs during year k (depreciation);

t | Effective income tax rate on ordinary income (federal, state) where t remains constant during the study period;

Tk | Income tax consequences during year k;

ATCFk | After Tax Cash Flow

What is never included in DCF (Discounted Cash Flows) ?

Financial cash flows such as interest payments because future cash flows are already discounted.
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Why in case of a loss is the tax CF modeled as a cash inflow for the firm?

  • Losses for this project compensate profits on projects in the same period;
  • Losses for the firm as a whole compensate losses in other periods;

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