LONG-TERM

(CAPITAL INVESTMENT)
DECISIONS
Frances Kariza M. Reyes
L.O.4: THE IMPACT OF
TAXES ON CAPITAL
INVESTMENT
DECISIONS
THE IMPACT OF TAXES ON
CAPITAL INVESTMENT DECISIONS
 Non-profit organizations do not pay income taxes and do not need to consider the impact of
income taxes on capital investment decisions
 Profit-making companies must pay income

taxes on any taxable income earned.

 Income Tax Rate in the Philippines = 5-32%
 Corporate Tax Rate = 30%
 Sales Tax/VAT rate = 12%
THE IMPACT OF TAXES ON
CAPITAL INVESTMENT DECISIONS
 The after-tax benefit or cost of a taxable cash inflow or a tax-deductible cash outflow is found
by multiplying the before-tax cash inflow or before-tax cash outflow by (1-tax rate)
 Disposal of assets may also have tax consequences. When an asset is sold or otherwise
disposed of, gain or loss is calculated on the difference between the sales price and book value
THE DEPRECIATION TAX
SHIELD
 Depreciation is a tax-deductible expense that does not involve a direct payment of cash.
 Although depreciation does not result in a direct cash outflow, it does not result in an indirect
cash inflow owing to the impact of depreciation on income taxes paid.
 Depreciation expense reduces a company’s taxable income and thus its income tax, resulting
in an increase in cash flow.
 This can easily be found by multiplying the depreciation expense by the tax rate.
EXHIBIT 8-5 TAX SAVINGS
FROM DEPRECIATION
COMPANY A COMPANY B
Income Cash Flow Income Cash Flow
Cash revenue $100,000 $100,000 $100,000 $100,000
Cash expense 60,000 60,000 60,000 60,000
Depreciation 0 0 10,000 0
Income (before tax) $40,000 $30,000
Income tax (40% 16,000 16,000 12,000 12,000
rate)
Net income $24,000 $18,000
Cash Flow $24,000 $28,000
L.O.5: THE
PAYBACK
METHOD
THE PAYBACK METHOD
 Payback Period is the length of time needed for a long-term project to recapture, or pay back,
the initial investment
 “How long does it take for a project to pay for itself?”
 The quicker the payback, the more desirable the investment
 Formula:

Original Investment_
Payback period=
Net annual Cash inflows
THE PAYBACK METHOD
Project A Project B
Initial Investment $(20,000.00) $(20,000.00)
Annual cash inflows 12,500.00 5,000.00
PV of cash inflows 21,693.75 21,776.50
NPV $1,693.75 $1,776.50
PI 1.085 1.089
Payback 1.6 years 4 years
($20,000/$12,500) ($20,000/$5,000)
THE PAYBACK METHOD
 The payback method can be useful as a quick approximation of the discounted cash flow
methods when the cash flows follow similar patterns
 It can also be useful in screening decisions if cash flow is a serious concern and management
wants to eliminate projects that would have adverse cash flow consequences.
REFERENCES:
 Sawyers, R.B., Jackson, S. & Jenkins, G. (2013). Managerial Accounting. Cengage Learning.
Asia PTE Ltd.
 Bureau of Internal Revenue. (2016). Index for Income Tax. Retrieved December 30, 2016
from www.bir.gov.ph/index.php/tax-information/income-tax.html#it003
 Balarkrishnan, R., Sivaramakrishnan, K. & Sprinkle, G. (2008). Managerial Accounting. John
Wiley & Sons.