Cash Flow Review

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Cash Flow Review
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A. Tax Approach Time Zero Cash Flow -
Investment - Working Capital Time 1-N Cash Flow
Revenues - Operating Costs - Taxes (IRS) Taxes
(IRS) Revenues - Operating Costs - Tax
Depreciation x Tax Rate Time N Additional Cash
Flow Salvage Value Return of Working
Capital Tax on
Disposition
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B. Net Income Approach (Book) Net Income
Revenues - Operating Costs - Book Depreciation -
Taxes (Book) Taxes (Book) Revenues -
Operating Costs - Book Depreciation x Tax
Rate Time Zero Cash Flow - Investment -
Working Capital Credit Time 1-N Cash Flow Net
Income Book Depreciation Deferred
Taxes Deferred Taxes Tax Depreciation - Book
Depreciation x Tax Rate Time N Additional Cash
Flow Salvage Value Working Capital Tax on
Disposition
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Example
Assume 10,000 Investment, 5-year straight line
book depreciation. Tax Depreciation 1,500
2,200 2,100 2,100 2,100 Revenues 5,000/y
ear Operating Costs 1,000/year Tax Rate 46
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Tax Approach

Time 0 Cash Flow
- Investment -10,000
Taxes (IRS) Rev - Op Costs - Tax Depr x Tax
Rate Year 1 5000 - 1000 - 1500 x 46
1150 Year 2 5000 - 1000 - 2200 x 46
828 Year 3 5000 - 1000 - 2100 x 46
874 Year 4 5000 - 1000 - 2100 x 46
874 Year 5 5000 - 1000 - 2100 x 46 874
Cash Flow Revenues - Op Costs - Taxes
(IRS) Year 1 5000 - 1000 - 1150
2850 Year 2 5000 - 1000 - 828
3172 Year 3 5000 - 1000 - 874
3126 Year 4 5000 - 1000 - 874
3126 Year 5 5000 - 1000 - 874 3126
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Net Income Approach
Time 0 Cash Flow - Investment -10,000 Net
Income Rev - Op Costs - Book Depreciation -
Taxes (Book) Taxes (Book) Rev - Op Costs -
Book Depreciation x Tax Rate
Taxes (Book) Year 1 5000 - 1000 - 2000 x 46
920 Year 2 5000 - 1000 - 2000 x 46
920 Year 3 5000 - 1000 - 2000 x 46
920 Year 4 5000 - 1000 - 2000 x 46
920 Year 5 5000 - 1000 - 2000 x 46 920
Net Income Year 1 5000 - 1000 - 2000 - 920
1080 Year 2 5000 - 1000 - 2000 - 920
1080 Year 3 5000 - 1000 - 2000 - 920
1080 Year 4 5000 - 1000 - 2000 - 920
1080 Year 5 5000 - 1000 - 2000 - 920 1080
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Deferred Taxes (Tax Depr - Book Depr) x Tax
Rate Year 1 1500 - 2000 x 46 (230) Year 2 2200
- 2000 x 46 92 Year 3 2100 - 2000 x 46
46 Year 4 2100 - 2000 x 46 46 Year 5 2100
- 2000 x 46 46 -0- (always sums to
zero!)
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Cash Flow Net Income Book Depreciation
Deferred Taxes Year 1 1080 2000 (230)
2850 Year 2 1080 2000 92
3172 Year 3 1080 2000 46
3126 Year 4 1080 2000 46
3126 Year 5 1080 2000 46 3126 Note
that the cash flows are identical in each period
regardless of approach! Must be true in all
cases.