294 Planning and Forecasting
Cash Flows in Later Years
We find cash f low in years 1 through 10 by applying the following formula:
Notice that we already have most of the data needed for the cash-f low formula,
but we are missing the forecasts for income tax and windfall tax. Before we can
finalize the cash f low computation, we have to forecast taxes.
Income tax equals earnings before taxes (EBT) times the income tax rate.
EBT is computed using the following formula:
The formula for EBT is similar to the formula for cash-f low, with a few impor-
tant exceptions. The cash-f low calculation does not subtract out depreciation,
whereas the EBT calculation does. This is because depreciation is not a cash
f low; the firm never has to write a check payable to “depreciation.” Deprecia-
tion does reduce taxable income, however, because the government allows this
deduction for tax purposes. So depreciation inf luences cash f low via its impact
on income tax, but it is not a cash f low itself. The greater the allowable depre-
ciation is in a given year, the lower taxes will be, and the greater the resulting
cash f low to the firm.
Earnings before Taxes=Sales−Cost of goods sold
−Selling, administrative, and general expenses
−Advertising
−DepreciationCash Flow=Sales−Cost of goods sold
−Selling, administrative, and general expenses
−Advertising
−Income tax
+Decrease in inventory (or −increase)
+Decrease in accounts receivable (or −increase)
−Decrease in accounts payable (or +increase)
+Salvage
−Windfall tax on salvageEXHIBIT 10.1 Initial year cash f low for
brewery project ($1,000s).Year 0
Construction $(8,000)
Land (1,000)
Inventory (1,000)
Account receivable (400)
Accounts payable 400
Total cash f low $(10,000)