E 120: Finance - Study Guide
E 120: Finance - Study Guide E 120
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This 2 page Study Guide was uploaded by an elite notetaker on Monday October 20, 2014. The Study Guide belongs to E 120 at University of California Berkeley taught by Alder in Fall. Since its upload, it has received 111 views. For similar materials see Finance in Engineering and Tech at University of California Berkeley.
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Date Created: 10/20/14
What is a tax shield Depreciation is a non cash expense For example if you have 100 for depreciation you will deduct this from your gross profit Recall the formula i EBIT Gross profit sales COGS depreciation expenses ii Tax paid EBIT tax rate iii Eg if you have 100 for depreciation you paid quot100 tax ratequot less in tax Eg tax rate 35 that means you save 35 Tax savings iv FCF EBIT 1 tax rate depreciation sales COGS depreciation 1 tax rate depreciation sales COGS 1 tax rate depreciation tax rate v The part with quotdepreciation tax rate is your tax shield This is some tax savings Selling at asset at a gain loss referring to the example covered in last class 1 Your gain loss selling price book value where book value original purchase price accumulated depreciation Asset Liabilities Cash 0 Equity Machine 110K Less accumulated depreciation 10K Machine Book Value 100K 2 Suppose we sell the machine at 50K Asset Liabilities Cash 50K Equity Earnings 50K A loss of 50K would reduce your earnings by 50K and so we saved tax of 50K tax rate If we instead sell the machine at 105K then we gain 5K and so we have to pay tax 5K tax rate
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