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Year
0 1 2 3
Capital -$90,000
Spending
10-13
LO1
NWC Example - continued
Cash Inflows = Sales Increase in A/R =
998 (110 100) = 988
Cash Outflows = Costs Increase in A/P +
Increase in Inventory = 734 (70 100) +
(80 100) = 744
Net Cash Flow = Cash Inflow Cash
Outflow = 988 744 = 244
10-14
LO1
NWC Example - continued
Or alternatively:
Change in NWC = Increase in A/R +
Increase in Inventory Increase in A/P =
10 + (-20) (-30) = 20
Net Cash Flow = Sales Costs Change
in NWC = 998 734 20 = 244
10-15
LO4
Capital Cost Allowance (CCA)
CCA is depreciation for tax purposes
The depreciation expense used for capital
budgeting should be calculated according
to the CCA schedule dictated by the tax
code
Depreciation itself is a non-cash expense,
consequently, it is only relevant because it
affects taxes
Depreciation tax shield = DT
D = depreciation expense
T = marginal tax rate
2016 McGraw-Hill Education Limited 10-16
LO4
Computing Depreciation
Need to know which asset class is appropriate
for tax purposes
Straight-line depreciation
D = (Initial cost salvage) / number of years
Very few assets are depreciated straight-line for tax
purposes
Declining Balance
Multiply percentage given in CCA table by the un-
depreciated capital cost (UCC)
Half-year rule
Can use PV of CCA Tax Shield Formula:
2016 McGraw-Hill Education Limited 10-17
LO4
PV of CCA Tax Shield Formula
IdTc 1 0.5r S n dTc 1
PV tax shield on CCA
d r 1 r d r (1 r ) n
Where:
I = Total Capital Investment
d = CCA tax rate
Tc = Corporate Tax Rate
r = discount rate
Sn = Salvage value in year n
n = number of periods in the project
25,441.05
NPV 45,806.54