แปล856-861
depreciation deduction of $120.000 results in incremental
income tax cash savings of $120,000 X 0.4, or $48,000 annually.
Exhibit 21-6, item 2b, shows these $48,000 amounts for years 1
through 5.9
For economic-policy reasons, usually to encourage (or in some
cases, discourage) investments, tax laws specify which
depreciation methods and which depreciable lives are
permitted. Suppose the government permitted accelerated
depreciation to be used, allowing for higher depreciation
deductions in earlier years. Should Vector then use accelerated
depreciation? Yes, because there is a general rule in tax
planning for profitable companies such as Vector: When there
is a legal choice, take the depreciation (or any other deduction)
sooner rather than later. Doing so causes the (cash) income tax
savings to occur earlier, which increases a project’s NPV.
3. Terminal Disposal of Investment. The disposal of an investment
generally increases as inflow of a project at its termination. An
error in forecasting the disposal value is seldom critical for a
long-duration project because the present value of the
amounts to be received in the distant future is usually small. For
Vector, the two components of the terminal disposal value of
an investment are (a) the after-tax cash flow from the terminal
disposal of buses and (b) the after-tax cash flow from recovery
of working capital.
3a. After-tax cash flow from terminal disposal of buses. At the
end of the useful life of the project, the bus’s terminal
disposal value is usually considerably less than the net
initial investment (and sometimes zero). The relevant cash
inflow is the difference in the expected after-tax cash
inflow from terminal disposal at the end of 5 years under
the two alternatives. Disposing of both the existing and
the new bus will result in a zero after-tax cash inflow in
year 5. Hence, there is no difference in the disposal-related
after-tax cash inflows of the two alternatives.
Because both the existing and new bus have disposal
values that equal their book values at the time of their
disposal (in each case, this value is $0), there are no tax
effects for either alternative. What if either the existing or
the new bus had a terminal value that differed from its
book value at the time of disposal? In that case, the
approach for computing the terminal inflow is identical to
that for calculating the aftertax cash flow from current
disposal illustrated earlier in item 1c.
3b. After-tax cash flow from terminal recovery of working–
capital investment. The initial
investment in working capital is usually fully recouped
when the project is terminated. At that time, inventories
and accounts receivable necessary to support the project
are no longer needed. Vector receives cash equal to the
book value of its working capital. Thus, there is no gain or
loss on working capital and, hence, no tax consequences.
The relevant cash inflow is the difference in the expected
working capital recovered under the two alternatives. At
the end of year 5, Vector recovers $36,000 cash from
working capital if it invests in the new hybrid bus versus
$6,000 if it continues to use the old bus. The relevant cash
inflow at the end of year 5 if Vector invests in the new bus
is thus $30,000 ($36,000 – $6,000).
Some capital investment projects reduce working
capital. Assume that a computer-integrated manufacturing
(CIM) project with a 7-year life will reduce inventories and,
hence, working capital by $20 million from, say, $50
million to $30 million. This reduction will be represented as
a $20 million cash inflow for the project in year 0. At the
end of 7 years, the recovery of working capital will show a
relevant incremental cash outflow of $20 million. That’s
because, at the end of year 7, the company recovers only
$30 million of working capital under CIM, rather than the
$50 million of working capital it would have recovered had
it not implemented CIM.
Exhibit 21-6 shows items 3a and 3b in the “year 5” column. The
relevant cash flows in Exhibit 21-6 serve as inputs for the four capital
budgeting methods described earlier in the chapter.
Forrester Tire Company needs to overhaul its auto lift system or
purchase a new one. The facts have been gathered, and they are as
follows:
Current Machine New
Machine
Purchase price, new $123,750
$162,800
Current book value 36,850
Overhaul needed now 30,250
Annual cash operating costs 69,300
52,800
Current salvage value 44,000
Salvage value in 5 years 8,800
38,500
Which alternative is the most desirable with a current required
rate on 14%? Show computations, and assume no taxes.
Project Management and Performance Evaluation
We have so far looked at ways to identify relevant cash flows and
techniques for analyzing them. The final stage (Stage 5) of capital
budgeting begins with implementing the decision and managing the
project. This includes management control of the investment activity
itself, as well as the project as a whole.
Capital budgeting projects, such as purchasing a hybrid bus or
videoconferencing equipment, are easier to implement than projects
involving building shopping malls or manufacturing plants. The
building projects are more complex, so monitoring and controlling
the investment schedules and budgets are critical to successfully
completing the investment activity. This leads to the second
