FIN 300 : Technical Note - Solved Capita Budgeting Problems.doc

• School: Ryerson University
• Department: Finance
• Course: FIN 300
• Professor: Michael Inglis

Document Summary

Remember that capital budgeting problems are based on cash flow from assets which is composed of three types of cash flows; 1) capital expenditure / sales, 2) operating cash flows and, 3) changes in nwc. We will be using the cca tax shield formula to solve all of these problems so we will write the operating cash flow as: The first term, (s-c)(1-t) is the after tax operating cash flow but ignoring the impact of depreciation. Remember depreciation (i. e. cca) in and of itself is not important (it"s a non cash item) however it does reduce your taxes. Cca tax shield which represents the dollar reduction in your taxes, in a given year, due to the ability to deduct cca before calculating your taxable income. If we use this formula we will not explicitly estimate the dt terms for each year so all we have to worry about is the (s-c)(1-t) component of operating cash flow: replacement problem.