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Investment appraisal – Further aspects of discounted cash flows

Dealing with tax in NPV calculations

Tax effects in investment appraisal

Tax on operating Tax relief on
cash flows investment spending

Additional income = Tax-allowable depreciation

additional tax paid. allowed as an expense against
Additional costs = less tax profits instead of depreciation
paid

2.1 Impact of taxation on cash flows

Unless stated otherwise:

 Tax inflows and outflows are relevant cash flows for NPV purposes.

 Operating cash inflows will be taxed at the prevailing tax rate

 Operating cash outflows will be tax deductible and save tax at the prevailing
rate

 Investment spending will attract tax-allowable depreciation

 The business is making net profits overall

 Tax is paid one year after the related operating cash flow is earned

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