The amount of net cash inflow realized from a taxable cash receipt after income tax effects have been considered is known. as the after-tax benefit ..[r]
(1)PowerPoint Authors:
Susan Coomer Galbreath, Ph.D., CPA Charles W Caldwell, D.B.A., CMA Jon A Booker, Ph.D., CPA, CIA Cynthia J Rooney, Ph.D., CPA
Copyright © 2014 by The McGraw-Hill Companies, Inc All rights reserved.
Income Taxes in Capital Budgeting Decisions
(2)Learning Objective 8-8
(Appendix 8C)
Include income taxes in a capital budgeting
(3)Simplifying Assumptions
Taxable income
equals net income as computed for
financial reports.
The tax rate is a flat percentage of
(4)Concept of After-tax Cost
After-tax cost
(net cash outflow) = (1 - Tax rate) Tax-deductible cash expense
An expenditure net of its tax effect is known as after-tax cost.
Here is the equation for determining the after-tax cost of any tax-deductible cash
(5)After-tax Cost – An Example
Assume a company with a 30% tax rate is contemplating investing in a training program
that will cost $60,000 per year.
We can use this equation to determine that the after-tax cost of the training program is
$42,000.
After-tax cost
(net cash outflow) = (1 - Tax rate) Tax-deductible cash expense
(6)After-tax Cost – An Example
The answer can also be determined by
calculating the taxable income and income tax
for two alternatives—without the training
program and with the training program.
The after-tax cost of the training program is
(7)After-tax Cost – An Example
After-tax benefit
(net cash inflow) = (1 - Tax rate) Taxable cash receipt
The amount of net cash inflow realized from a taxable cash receipt after income tax effects have been considered is known