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Managerial Accounting ed 15 Chapter 13C
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PowerPoint Authors:Susan Coomer Galbreath, Ph.D., CPACharles W. Caldwell, D.B.A., CMAJon A. Booker, Ph.D., CPA, CIACynthia J. Rooney, Ph.D., CPA
Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Income Taxes in Capital Budgeting DecisionsAppendix 13C
13C-2
Learning Objective 8
(Appendix 13C)
Include income taxes in a net present value
analysis.
13C-3
Simplifying Assumptions
13C-4
Simplifying Assumptions
13C-5
Key Concepts
To calculate the amount of income tax expense associated with a capital budgeting project, we’ll be using a two-step process:
13C-6
Key Concepts
A capital budgeting project’s incremental net income computations include:
1. Annual revenues.2. Annual cash operating expenses.3. Annual depreciation expense.4. One-time expenses related to repairs and
maintenance.
13C-7
Key Concepts
A capital budgeting project’s incremental net income computations exclude:
1. Immediate investments in equipment, other assets, and installation costs.
2. Investments in working capital.3. The release of working capital.4. The proceeds from selling a noncurrent asset
when no gain or loss is realized on the sale.
13C-8
Holland Company – An Example
Holland Company owns the mineral rights to land that has a deposit of
ore. The company is deciding whether to purchase equipment and open a mine on the property. The
mine would be depleted and closed in 5 years and the equipment would
be sold for its salvage value.
More information is provided on the next slide.
13C-9
Holland Company – An Example
Should Holland
open a mine on the
property?
Initial investment in equipment
$ 275,000
Initial investment in working capital
$ 50,000
Estimated annual sales of ore $ 250,000 Estimated annual cash operating expenses $ 150,000 Cost of road repairs needed in 3 years $ 30,000 Salvage value of the equipment in 5 years $ - After-tax cost of capital 12%Tax rate 30%
13C-10
Holland Company – An Example
13C-11
Holland Company – An Example
13C-12
Holland Company – An ExampleThe net present value computations include the
following:
13C-13
Holland Company – An ExampleEach year’s total cash flows are multiplied by the appropriate discount factor for 12% to compute their lesser present value.
13C-14
Holland Company – An ExampleThe present values in cells B22 through G22 are combined to
determine the project’s net present value of $231.
The positive net present value indicates that Holland Company should proceed with the mining project.
13C-15
End of Appendix 13C