![]() Solution:Īfter-tax benefit or after-tax cash inflow = (1 – Tax rate) × Taxable cash receiptĪ tax deductible cost reduces taxable income of the entity and helps save its income tax. ![]() XYZ company generated $500,000 cash from its operations. An example of taxable cash inflow is cash generated by a company from its operations.Īfter tax benefit or after tax cash inflow can be easily computed using the following formula:Īfter-tax benefit or after-tax cash inflow = (1 – Tax rate) × Taxable cash receipt Example 1: When income tax is considered in capital budgeting decisions, we use after-tax cash inflow. Taxable revenues or cash inflows, when reduced by the income tax, are known as after-tax benefit or after-tax cash inflow. Let’s briefly explain and exemplify each and then apply them in the computation of a NPV of a project. These concepts are after-tax benefit, after-tax cost and depreciation tax shield. ![]() Before explaining the impact of income tax on capital budgeting decisions using a net present value (NPV) example, we need to understand three important concepts. An investment that looks desirable without considering income tax may become unacceptable after considering it. The income tax usually has a significant impact on the cash flow of a company and therefore needs to be taken into account while making capital budgeting decisions.
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