Depreciation and Income Taxes - Introduction of concepts

9 important questions on Depreciation and Income Taxes - Introduction of concepts

Why are income taxes resulting from the profitable operation of a firm usually taken into account in evaluating engineering projects?

Income taxes affect project estimated cash flows. More specifically income taxes associated with a proposed project may represent a major cash outflow that should be considered together with other cash inflows and outflows in assessing the overall economic profitability of the project.

What is widely accepted in after-tax engineering and economy studies?

MARR should be at least the tax-adjusted weight average cost of capital. (WACC)

Why is often a value higher than the WACC (Weighted AVerage Cost of Capital) assigned to the after-tax MARR?

To reflect the opportunity cost of capital, perceived risk, and uncertainty of projects being evaluated, policy issues such as organizational growth and shareholders satisfaction.
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How to calculate before-tax income or loss, taxable income?

Taxable income = gross income - all expenses except capital investments - depreciation deductions

Explain the difference between MARR and WACC

MARR | Is the return 'speed' of capital investment.

WACC | Cost of each part of the companies capital structure based on the proportion of equity, debt and preferred stock.

What is the effective tax rate?

Percentage of the income that an individual or corporation pays in taxes.

What is meant with cost of debt?

The effective interest rate a company pays on its debts. (Before tax and after tax)

  • What is DCF?
  • How do you calculate?

Discounted Cash Flow
Valuation method used to estimate the value of an investment based on its expected future cashflow.

Considering the DCF how do you calculate the NPV?

NPV = DCF - Investment

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