Discussion Assignment 3 PDF

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Discussion Assignment 3...

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The impact of taxes on capital budgeting Introduction Capital budgeting is a process that the companies employ to determine the worthiness of the company’s long term investments, those investments includes activities like purchasing new machines or production equipment, machinery replacement, buy or build new buildings, introduce new products, and many more (Lumen, n.d.). Decisions made on the basis of this process are called a capital budgeting decisions. Variety of analysis tools could be used for this purpose; NPV calculation is one of the most important capital budgeting methods. Income taxes is not taking in consideration for not-for-profit or governmental organizations. However, they have a considerable impact on cash flows of for- profit firms (Heisinger, K., & Hoyle, J.B., 2012). In this discussion I will light on capital budgeting items that may or may not be adjusted for income taxes during capital budgeting calculation. The impact of income taxes on capital budgeting items Heisinger, K., & Hoyle, J.B. (2012) addressed four main capital budgeting items: 

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Cash outflows of investment: including initial project investment like equipment or machines which have no direct impact on net income; hence they are not subject to income taxes. Cash outflows of working capital: this cash is not adjusted for income taxes as it is not affecting the net income. Revenues cash inflows and expenses cash outflows: because these money affect the net income of the company they are taxable and calculated by multiplying with (1- tax rate) to find after cash flows. Depreciation: it is a financial way to allocate cost of a physical asset over its useful life. (Parker, 2019). It is not a cash outflow but it reduces taxable income so it is reduces the paid tax amount and this saving of tax called “depreciation tax shield” which could be calculated by multiplying the depreciation expenses by the tax rate (Heisinger, K., & Hoyle, J.B., 2012).

Conclusion In general, any cash inflow or outflow affect the net income is taxable and should be taken in consideration while performing the capital budgeting calculation for profit organizations.

Bibliography

Heisinger, K., & Hoyle, J.B. (2012). Accounting for managers. Saylor Foundation. https://resources.saylor.org/wwwresources/archived/site/textbooks/Managerial %20Accounting.pdf Lumen Learning. (n.d.). The relationship between risk and capital budgeting. Boundless Finance. https://courses.lumenlearning.com/boundless-finance/chapter/the-relationship-betweenrisk-and-capital-budgeting/ Parker, J. (2019). How Depreciation Affects Cash Flow. https://www.investopedia.com/ask/answers/080216/how-does-depreciation-affect-cash-flow.asp...