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Management accounting: Information for creating and managing value (4/e): Chapter 22 - Kim Langfield-Smith, Helen Thorne

Chapter 22 - Further aspects of capital expenditure decisions. This chapter presents the following content: Income taxes and capital expenditure analysis, after-tax cash flows, depreciation methods, profit and loss on disposal, investment in working capital,. | Chapter 22 Further aspects of capital expenditure decisions 22- Income taxes and capital expenditure analysis In profit-seeking enterprises, income taxes are usually payable Taxation payments are cash flows Taxation payments and tax deductions must be considered in any cash flows used in a capital expenditure proposal Taxation implications may dominate other aspects in the analysis of capital expenditure decisions 22- After-tax cash flows After-tax cash flows Cash flows after all the tax implications have been taken into account Tax effect of an increase in sales Consider incremental revenue and costs arising from a capital expenditure decision continued 22- After-tax cash flows Tax effect of additional expenses = incremental expense × (1 – tax rate) continued 22- After-tax cash flows Non-cash expenses Such as depreciation Are not cash flows Can produce tax savings and, hence, savings in cash outflows continued 22- After-tax cash flows Some cash flows do not appear on the profit statement in the same period in which they occur Purchase of a depreciable asset is a cash outflow in the period of purchase, but not an expense of the current period Cash outflows from purchase have no direct tax consequences continued 22- continued 22- After-tax cash flows Timing of tax payments Cash flows resulting from income taxes do not occur in the same year as the before-tax cash flows Timing of cash flows Cash flows from a proposal are not always recognised as revenue or expenses in the same year Slight timing differences are difficult to include in a capital expenditure analysis 22- Depreciation methods Australian tax laws allow two methods of depreciation Straight line (or prime cost) Diminishing value, based on written-down value of the asset The method used will affect the after-tax cash flow projections Taxation versus accounting depreciation The impact of a capital expenditure project on cash flows will result from taxation depreciation, not | Chapter 22 Further aspects of capital expenditure decisions 22- Income taxes and capital expenditure analysis In profit-seeking enterprises, income taxes are usually payable Taxation payments are cash flows Taxation payments and tax deductions must be considered in any cash flows used in a capital expenditure proposal Taxation implications may dominate other aspects in the analysis of capital expenditure decisions 22- After-tax cash flows After-tax cash flows Cash flows after all the tax implications have been taken into account Tax effect of an increase in sales Consider incremental revenue and costs arising from a capital expenditure decision continued 22- After-tax cash flows Tax effect of additional expenses = incremental expense × (1 – tax rate) continued 22- After-tax cash flows Non-cash expenses Such as depreciation Are not cash flows Can produce tax savings and, hence, savings in cash outflows continued 22- After-tax cash flows Some cash flows do not .