what companies doCASH FLOW AND CAPITAL
BUDGETING
10-1 Types of cash flows
10-2 Incremental cash flows
10-3 Cash flows for Protect IT Ltd
10-4 Special problems in capital budgeting
10-5 The human face of capital budgeting
CAN TAX RELIEF STIMULATE INVESTMENT?
Historically, tax law required business to depreciate
long-lived assets such as plant and equipment
gradually, over several years, rather than deduct
the entire cost of these investments from income
in the year they were purchased. Since writing off
the cost of new equipment reduces the income
that is subject to taxation (and thereby decreases
businesses’ tax bills), businesses generally prefer to
deduct those costs as soon as possible.
Based on this, policymakers recognise that
changes to depreciation rules can alter the
incentives that businesses have to make new
investments. All else being equal, allowing
companies to write off the cost of new assets
more rapidly increases the net present value (NPV)
of these investments. This can be used to try to
stimulate economic growth – policymakers hope
that by allowing businesses to depreciate their
assets more rapidly, they can encourage thesebusinesses to invest more and hire more workers to
get the economy moving again.
In Australia, both the Rudd and Gillard
Federal governments used this idea to stimulate
investment. They introduced a ‘small business tax
break’ allowing small businesses to claim a bonus
tax deduction of 50% of the cost of eligible capital
investments, like computers and vehicles, acquired
between 13 December 2008 and 31 December
2009, and installed by 31 December 2010. Larger
businesses were also offered tax incentives to
encourage investment, but at a smaller rate (30% or
10%). The idea was to stimulate new investment in
order to boost economic growth.
In July 2012, the Gillard government introduced
a number of further incentives to assist small
businesses with investing and improving their
cash flows. One of the major benefits was the
introduction of a $6,500 ‘instant asset write-off’.Bring your learning to life with interactive learning, study, and exam preparation tools that support the printed
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