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Project Appraisal and Management

Financial Analysis P & L Account-Depreciation and Tax Cash Flow

Session Outline

Concepts of Depreciation and Tax

Components of Cash Flow

Profit and loss Account

PROFIT BEFORE DEPRE & TAX

(A-B)+(C-D)

i.e. Net Operating Profit + Net Non-Operating Profit

Depreciation as per CO Act PROFIT BEFORE TAX

Corporate Tax PROFIT AFTER TAX

Depreciation

A regular reduction in asset value over time.

Tax deductable

As per IT Act and Co. Act

Two Methods

Written Down Value Method

Straight Line Method

WDV for IT purpose

• SLM for Company’s internal P & L

Depreciation

Written Down Value Method

Depreciation calculated on written down value

Eg. Depreciation rate 10%

Year

1

2

3

4

Value of Asset

100

90

81

72.9

Depreciation

10

9

8.1

7.3

WDV

90

81

72.9

65.6

Dn = I (1-d)^(n-1) * d (d=depreciation value, n= number of year)

Depreciation

Straight Line Method

Depreciation calculated on Initial Cost

Eg. Depreciation rate 10%

Year

1

2

3

4

Value of Asset

100

Depreciation

10

10

10

10

Dep’ted Value

90

80

70

60

Profit and loss Account

Depreciation (Assets land)

PROFIT BEFORE TAX Corporate Tax

PROFIT AFTER TAX

Tax

As per section 80 IA

Taxable income Tax Holiday Mini Alternative (MAT) Tax/ Alternative Mini Tax (AMT) Corporate Tax

A levy placed on the profit; different rates are used for different levels of profits and types of projects (@ 35% for Infra projects)

Cash Flows

It is inflow and outflow of cash that matters practically in any project

Cash flow estimation is most critical in investment/financial analysis

Financial manager prepares this in consultation with experts in accounting, production, marketing, economics, technology etc.

It is the cash which project has in hands to make payments to creditors, invest for future expansion and operations distribute to share holders etc

Cashflow is difference between the cash received and cash paid out

Cash Flows

SOURCES OF FUNDS

Net Profit After Depreciation & Taxes

Depreciation

Periodic Funds for Rolling Stock additions during Operations Salvage value of assets sold if any (normally towards end of period)

A. Total Sources of Funds

USES OF FUNDS

Rolling Stock Additions during Operations Period Any other periodic use of fund

Removal cost of assets

B. Total Uses of Funds

NET CHANGES IN CASH BALANCE

(A-B)

Cash Flows

Three stages of cash flow

Initial Investment (Capital investment plan)

Net Annual Cash Flow (Cash Flow Statement)

Terminal Cash Flows (Cash Flow Statement)

Salvage value of assets sold (if any)

Cash proceeds to be added as cash inflow in last year

Removal cost (to replace existing asset)