FNT1
PRESENTATION FOR
COMPANY X
BY: Jae Kierstin Carreira
1
PART B1 Identify what the correct net cash flow for the second year would be if all expenses were as described but there was no depreciation costs.
Here is what we know already:
Year two Net Cash Flow with depreciation
Expected annual sales of new product
Expected annual costs of new product cash expenses depreciation expenses
Income before taxes
Income tax at marginal rate
Net income
Net annual cash flow for years shown
3,170,000
2,400,000
380,000
390,000
124,800
265,200
645,200
2
Year two Net Cash Flow with NO depreciation
Expected annual sales of new product
Expected annual costs of new product cash expenses depreciation expenses
Income before taxes
Income tax at marginal rate
Net income
Net annual cash flow for years shown
3,170,000
2,400,000
380,000
770,000
246,400
523,600
523,600
You will notice that our net annual cash flow for year two is lower when we do not apply the depreciation back to the net income.
Year two annual cash flow with depreciation
$645,200
Year two cash flow with NO depreciation
$523,600
A difference of $121, 600 in annual cash flow.
3
PART B1a What is the impact of depreciation on net cash flow for year 2?
Applying depreciation reduces the amount you pay in taxes because it reduces your taxable income.
For Example:
Y2 with depreciation Y2 with NO depreciation
Income before taxes
Income tax at marginal rate
Net income
390,000
770,000
124,800
246,400
265,200
523,600
Therefore, depreciation affects cash flow by reducing the amount of cash a business must pay in income taxes.
As you can see above, not taking depreciation will result in Company D paying
$121,600 additional in taxes.
4
PART B2
The time value of money
Before we can address a decision process for Net Present Value (NPV) and Internal Rate of
Return (IRR) we must first understand the time value of money. In our case we will use the time value of $1.
A very simple explanation of this concept is to say
COMPANY X
BY: Jae Kierstin Carreira
1
PART B1 Identify what the correct net cash flow for the second year would be if all expenses were as described but there was no depreciation costs.
Here is what we know already:
Year two Net Cash Flow with depreciation
Expected annual sales of new product
Expected annual costs of new product cash expenses depreciation expenses
Income before taxes
Income tax at marginal rate
Net income
Net annual cash flow for years shown
3,170,000
2,400,000
380,000
390,000
124,800
265,200
645,200
2
Year two Net Cash Flow with NO depreciation
Expected annual sales of new product
Expected annual costs of new product cash expenses depreciation expenses
Income before taxes
Income tax at marginal rate
Net income
Net annual cash flow for years shown
3,170,000
2,400,000
380,000
770,000
246,400
523,600
523,600
You will notice that our net annual cash flow for year two is lower when we do not apply the depreciation back to the net income.
Year two annual cash flow with depreciation
$645,200
Year two cash flow with NO depreciation
$523,600
A difference of $121, 600 in annual cash flow.
3
PART B1a What is the impact of depreciation on net cash flow for year 2?
Applying depreciation reduces the amount you pay in taxes because it reduces your taxable income.
For Example:
Y2 with depreciation Y2 with NO depreciation
Income before taxes
Income tax at marginal rate
Net income
390,000
770,000
124,800
246,400
265,200
523,600
Therefore, depreciation affects cash flow by reducing the amount of cash a business must pay in income taxes.
As you can see above, not taking depreciation will result in Company D paying
$121,600 additional in taxes.
4
PART B2
The time value of money
Before we can address a decision process for Net Present Value (NPV) and Internal Rate of
Return (IRR) we must first understand the time value of money. In our case we will use the time value of $1.
A very simple explanation of this concept is to say