Capital Budgeting

Income tax
NPV after Tax- Steffie

On Jan. 1, 2021 Steffie bought a new machine for [100,000 with an estimated
useful life of five years and no salvage. For book and tax purposes, the
machine will be depreciated using the straight line method and it is expected
to produce annual cash flow from operations, before income taxes, of P40,000.

Steffie uses a time adjusted rate of 12% and its income tax rate will be 40%
for all years.

The present value of P1 at 12% for five periods is 0.57, and the present value
of an ordinary annuity of P1 at 12% for five periods is 3.61.

The NPV of the machine should be

a. P15,520 positive b. P 15,520 negative

c. P 14,000 positive d. P 13,680 negative

Form for Capital Budgeting-1

This format (following slides) can be used for revenue and expenses for a
proposed project. If the same depreciation method is used on both the books
and the return, you only need to complete the first column.

(Many capital budgeting problems allow you to assume that the same
depreciation methods is used for both purposes.)
 Capital Budgeting
Gains or Losses on Disposal -1

Suppose a piece equipment purchased for P125,000 is sold at the end of

year 3 after taking three years of straight-line depreciation.
What is the book value?

P125,000 – (3 × $25,000) = P50,000

• Gains or Losses on Disposal – 2

Assume that it is sold for P70,000

and the tax rate is 40%.
What is the cash inflow?

SOLUTION:

(P70,000 – P50,000) × 40% = P8,000

P70,000 – P8,000 = P62,000