Finance Exam #3
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Depreciation has ____ ____ consequence because it influences the tax bill.
When book value = salvage value what do you do?
when book value is < salvage value what do you do?
report and pay tax becase you made money
when book value > salvage value what do you do?
it didn't depreciate enough
incremental cash flows
Different betwen a firm's future cash flows with a project and those without a project
- -a cost we have already paid or have already incurred the liability to pay
- -firm has to pay no matter what
- -not considered in investment decision
most valuble alternative that is given up if a particular investment is undertaken
spillover effects, both good and bad
- -cash flows of a new project that come at the expense of a firm's existing projects
- -because of other lines in consumer products
- -any sales lost as a result of our launching a new product might be lost anyway because of future competition
- -basic form of what if analysis
- -what happens to NPV
- -to get worst cast scenario assign least favorable value to each item (low value for units sold and price per unit and high value for costs)
freeze all variables except one and see how sensitive our estimate of NPV is to changes in one variable
exists when a positive NPV is available but we can't get needed funds
pro forma financial statements
project future years operations
depreciation tax shield
tax saving that results from the depreciation, deduction, calculated as depreciation multiplied by the corporate tax rate
accelerated cost recovery system (ACRS)
depreciation method under US tax law allowing for the accelerated write-off of property under various classifications
what should be included in a cash flow at time zero?
- -Initial inventory increase
- -initial purchase of fixed assets
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