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Managerial Accounting ed 15 Chapter 13C

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Managerial Accounting ed 15 Chapter 13C

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Managerial Accounting ed 15 Chapter 13C

  1. 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 © 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 Decisions Appendix 13C
  2. 2. 13C-2 Learning Objective 8 (Appendix 13C) Include income taxes in a net present value analysis.
  3. 3. 13C-3 Simplifying Assumptions
  4. 4. 13C-4 Simplifying Assumptions
  5. 5. 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:
  6. 6. 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.
  7. 7. 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.
  8. 8. 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.
  9. 9. 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%
  10. 10. 13C-10 Holland Company – An Example
  11. 11. 13C-11 Holland Company – An Example
  12. 12. 13C-12 Holland Company – An Example The net present value computations include the following:
  13. 13. 13C-13 Holland Company – An Example Each year’s total cash flows are multiplied by the appropriate discount factor for 12% to compute their lesser present value.
  14. 14. 13C-14 Holland Company – An Example The 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.
  15. 15. 13C-15 End of Appendix 13C

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