Impact of Depreciation and Taxes on Cash Flow PPT


This PPT slide, part of the 105-slide How to Develop a Business Case PowerPoint presentation, presents a framework for understanding the financial impact of depreciation and taxes on cash flow analysis. It emphasizes the importance of these elements in evaluating capital expenditures. The section on depreciation outlines that capital expenditures lead to depreciation expenses over the asset's useful life. Notably, it clarifies that while depreciation does not directly affect cash outflows, the associated tax savings—referred to as a tax shield—do influence cash flows positively.

The slide provides a structured approach, detailing comments and issues related to depreciation and taxes. For depreciation, it includes an example illustrating a capital expenditure of $300,000 with a three-year depreciation period, resulting in an annual depreciation expense of $100,000. The marginal tax rate is set at 40%, leading to a calculated depreciation tax shield of $40,000. This demonstrates how depreciation can create tax savings that enhance cash flow.

The tax section indicates that net cash flows from operating losses can also yield tax benefits. An example shows an operating loss of $200, with the same marginal tax rate of 40%. The calculation for after-tax cash flow reveals a negative cash flow of $120 after accounting for taxes. This highlights how losses can still impact overall financial performance through tax implications.

Understanding these dynamics is crucial for decision-makers. The insights provided in this slide can help executives assess the financial ramifications of their capital investments and operational performance, ensuring a more informed approach to cash flow management.




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