wk 8 dq

Finance

Student’s Name

Institutional Affiliate

Date

Taxes are the most important source of budget income in developed economies. Taxes seem to be distinguished from most forms of income since they are obligatory because they are recurring. There are no taxes charged in order to trade for, for example, a certain public utility, or to sell, or otherwise to issue public debt, any public land. Taxes are raised to see the wellbeing of taxpayers, and is expressed in areas like the construction of public schools and clinics. The paper will get to determine different tax rations more so when it comes to the government . This involve the current net worth, straight line depreciation pace, book value, and rescue value (De Waegenaere & Wielhouwer, 2011).

However, the initial tax rate is excluded. Such cases include wage taxes based on labour wages. That means that the higher the profits, the higher the salary tax and vice versa. This levy is used for financing pension payments, social insurance schemes and other medical payment bills, the primary purpose of which is to support the consumer. The connection between taxes paid and benefits makes wage taxes a donation . However, tax contributions are sometimes obligatory and the connection with their advantages is often comparatively small.

The direct depreciation approach is used mostly to assign fixed asset costs. This approach results in a uniform decrease in the valuation of the asset for a fixed timeframe before the salvage value is achieved. The estimation of the direct depreciation is based on asset expense minus the salvage value of the asset, which is separated with the years in which the assets that have been acquired needs to be utilized (Greenwood & Scharfstein, 2013).

The rescue worth tests a property's book value at the end of its economic life. The book value is measured below the depreciation. The scraped value is the forecast value at the end of a property's economic existence. The net present value of a project represents a change in a business. The difference in the total value of a company's value or capital, which will be due to the approval of the project over a long period of time. It adds up the current value of the business, which is the total cash inflow of the project, and subtracts the first expenditure outlay and thus represents itself as the most accurate method of capital budgeting, taking the discounted cash approach. The fact that a project has a total valuation of zero means that the sum of the cash flow required by the project is zero or less (Ibarra, 2013).

Question one

Discount Rate = 20%

 

Calculation of NPV is as follows

Year	Cash Flow	PVF(20%,Year)	Present Value
0	-100	1.000	-100
1	43.33	0.833	36
2	43.33	0.694	30
3	58.33	0.579	34
NPV	0

 

Yes, NPV = 0 at 20% discount rate

Question two

Salvage Value before tax after 2 Years = 50

Salvage Value after tax after 2 Years = 50(1-0.40) = 30

Discount Rate = 20%

Cash flow after 2 Years = 43.33+30=73.33

As per above data NPV of project is as follows:

Year	Cash Flow	PVF(20%,Year)	Present Value
0	-100	1.000	-100
1	43.33	0.833	36
2	73.33	0.694	51
NPV	-13

 

If we finish in Year 2, our NPV would be -13

Question three

When depreciation is 100% in year 1, cash and NPV flows are as follows.

Cash balance and NPV statement as follows

Sr No.	Year	0	1	2	3
1	Initial Investment	100
2	Revenue		100	100	100
3	Operating Cost		50	50	50
4	Tax Depreciation		100	0	0
5	Income Pre Tax		-50	50	50
6	Tax at  40%		0	20	20
7	Net Income		-50	30	30
8	After-Tax Salvage				15
Cash Flow(7+8+4-1)	-100	50	30	45
PVF(20%,Years)	1.000	0.833	0.694	0.579
Present Value	-100.00	41.67	20.83	26.04

NPV of project = Sum of Present Values

                          = -100+41.67+20.83+26.04

                          = -11.46

 

hence NPV of Part a will decreased by 11.46

 

 

Part b

Cash balance and NPV statement as follows

Sr No.	Year	0	1	2
1	Initial Investment	100
2	Revenue		100	100
3	Operating Cost		50	50
4	Tax Depreciation		100	0
5	Income Pre Tax		-50	50
6	Tax at  40%		0	20
7	Net Income		-50	30
8	After-Tax Salvage			30
Cash Flow(7+8+4-1)	-100	50	60
PVF(20%,Years)	1.000	0.833	0.694
Present Value	-100.00	41.67	41.67

 

NPV of project = Sum of Present Values

                          = -100+41.67+41.67

                          = -16.67

 

The NPV of Part B is also reduced by 3.67 (i.e. 16.67-13)

question 4

No, As can be seen from the equations above, if completed after 3 years, NPV of the project is larger than NPV if completed after 2 years. After three years it is often advisable to finish the plant (Kulp & Hartman, 2011).

Question 5

Response will adjust as follows

Part one

Cash Flow and NPV Statement is as follows

Sr No.	Year	0	1	2	3
1	Initial Investment	100
2	Revenue		100	100	100
3	Operating Cost		50	50	50
4	Tax Depreciation		33.33	33.33	33.33
5	Income Pre Tax		16.67	16.67	16.67
6	Tax at  0%		0	0	0
7	Net Income		16.67	16.67	16.67
8	After-Tax Salvage				25
Cash Flow(7+8+4-1)	-100	50	50	75
PVF(20%,Years)	1.000	0.833	0.694	0.579
Present Value	-100.00	41.67	34.72	43.40

 

Project NPV = Sum of current values

                          = -100+41.67+34.72+43.40

                          = 19.79

 

Therefore Part A NPV is equivalent to 19.79

Part b.

 

Cash balance and NPV statement as follows

Sr No.	Year	0	1	2
1	Initial Investment	100
2	Revenue		100	100
3	Operating Cost		50	50
4	Tax Depreciation		33.33	33.33
5	Income Pre Tax		16.67	16.67
6	Tax at  0%		0	0
7	Net Income		16.67	16.67
8	After-Tax Salvage			50
Cash Flow(7+8+4-1)	-100	50	100
PVF(20%,Years)	1.000	0.833	0.694
Present Value	-100.00	41.67	69.44

 

 

NPV of project = Sum of Present Values

                          = -100+41.67+69.44

                          = 11.11

 

Therefore, Part B NPV is equivalent to 11.11 

Decision

As part an of the NPV equations is greater than part b, part an is also more useful to us.

The tax thresholds consume the company's income and cash balances. In the first point, it affects daily cash flows which ultimately benefits the rescue of a project if any gains or losses have tax implications. The revenue appraisal guarantees that the salvage value increases, that the NPV increases, and that the salvage value and book value are improved.

The method of direct depreciation is mostly used to assign fixed asset costs. In this step, the value of the asset is uniformly decreased over a certain time period until it is saved. The estimate of the direct depreciation is dependent on assets minus the rescue value of the commodity, divided by the number of years the asset is to be used. The rescue worth tests a property's book value at the end of its economic life. The book value is measured below the depreciation. The scraped value is the forecast value at the end of a property's economic existence. The net present value of a project represents a change in a business. It indicates the net worth shift (Hulten & Wykoff, 1980). 

The value or equity of the business will have been the product of the project approval over a long period. This makes up the current valuation of a product, which ensures the total capital inflows of the project and the original spending outlay is reduced. It stands as the most reliable strategy in capital budgeting by taking the discounted cash method. The fact that a project has a total valuation of zero means that the sum of the cash flow required by the project is zero or less (Archibald, 1967).

References

Archibald, T. R. (1967). The return to straight-line depreciation: An analysis of a change in accounting method. Journal of accounting Research, 164-180.

Hulten, C. R., & Wykoff, F. C. (1980). The measurement of economic depreciation (pp. 81-125). Urban Institute.

Kulp, A., & Hartman, J. C. (2011). Optimal tax depreciation with loss carry-forward and backward options. European journal of operational research, 208(2), 161-169.

Ibarra, V. C. (2013). The straight-line depreciation method used by selected companies and educational institutions in the Philippines. Journal of Modern Accounting and Auditing, 9(4), 480.

De Waegenaere, A., & Wielhouwer, J. L. (2011). Dynamic tax depreciation strategies. OR Spectrum, 33(2), 419-444.

Greenwood, R., & Scharfstein, D. (2013). The growth of finance. Journal of Economic Perspectives, 27(2), 3-28.