GSU ACCT 2102 - Capital Budgeting Process (3 pages)

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Capital Budgeting Process

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Capital Budgeting Process


Lecture number:
Lecture Note
Georgia State University
Acct 2102 - Prin of Acct Ii

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ACCT 2102 Lecture 2 Outline of Last Lecture I Capital Budgeting Process II Cost of Capital III Cost of Debt IV Cost of Equity V Weighted Average Cost of Capital VI Net Present Value Method of Capital Budgeting VII Net Present Value Analysis Outline of Current Lecture I Cash Flows A Importance of Cash Flows B Sources of Cash Flows C Calculation of Sources II Depreciation A Overview of Depreciation B Methods of Depreciation III After Tax Cash Flows A Computation of After Tax Cash Flows Current Lecture Cash Flows o When a business has an increase in revenues assets or a decrease in expenses liabilities there in an increase in net income o Generally this increase in net income increases cash flows o Remember Net income Cash flow Sources of Cash Inflow o Along with increasing cash flow an increase in net income causes an increase in taxes o Due to this increase for NPV analysis we use after tax cash inflows o You must account for depreciation It is a huge non cash expense These notes represent a detailed interpretation of the professor s lecture GradeBuddy is best used as a supplement to your own notes not as a substitute o The importance of depreciation is that although it does not affect cash it affects taxes and generate tax savings Calculating after tax cash flow ATCF Step 1 pre tax cash flow tax rate taxes being paid Step 2 pre tax cash flow taxes being paid ATCF Ex A company s pre tax cash flows for the year are 100 000 and its income tax rate is 35 Step 1 100 000 35 35 000 Step 2 100 000 35 000 65 000 Your after tax cash flow is 65 000 Depreciation o At some point the assets we ve purchased and capitalized on become used up o Definition of depreciation the process of expensing the costs of an asset over the periods in which the asset was used to help produce revenues accounting for the using up of the asset o Useful life is the time period which the assets generate revenues o Depreciation is an example of the matching principle in which under the accrualbasis of

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