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 Companys 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
Depted 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)