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Income Taxes and Capital Budgeting

Income Taxes and Capital Budgeting. Cash flows from an investment proposal affect the company’s profit and its income tax liability. Income = Revenue - Expenses + Gains - Losses. After-Tax Cash Flows. The tax rate is 28%, so income taxes are $525,000 × 28% = $147,000.

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Income Taxes and Capital Budgeting

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  1. Income Taxes and Capital Budgeting Cash flows from an investment proposal affect the company’s profit and its income tax liability. Income = Revenue - Expenses + Gains - Losses

  2. After-Tax Cash Flows The tax rate is 28%, so income taxes are $525,000 × 28% = $147,000

  3. Investment in Working Capital Some investment proposals require additional outlays for working capital such as increases in cash, accounts receivable, and inventory.

  4. Internal Rate of Return (IRR) The interest rate that equates the present value of inflows and outflows from an investment project.

  5. Additional Methods for Making Investment Decisions Payback Method Payback period Initial investment Annual after-tax cash inflow = A company can purchase a machine for $20,000 that will provide annual cash inflows of $4,000 for 7 years. Payback period $20,000 $4,000 = = 5 years

  6. Accounting-Rate-of-Return Method Discounted-cash-flow method focuses on cash flows and the time value of money. Accounting-rate-of-return method focuses on the incremental accounting income that results from a project.

  7. Capital Budgeting Practices Percent of managers who believe each technique is important.

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