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need help on financial modeling for a new project

Ron Rochester's Profile

Specifically, I am creating a DCF Model in EXCEL to analyze using (IRR, Payback etc) for a project: I have a sample model that has a line for an adjustment to cash flows for: " Federal Tax on State Depreciation" . Not sure what this is or why it is relevant. the model ? can someone explain? Secondly, any good on- course or source for improving financial modeling skills would be greatly appreciated. Thanks in advance.

Answers

Topic Expert
Keith Perry
Title: Consulting CFO and Business Operations A..
Company: Growth Accelerator
(Consulting CFO and Business Operations Advisor, Growth Accelerator) |

Ron,

Serge had a course that covered some of these topics. Really interesting stuff.
https://www.proformative.com/courses/lease-vs-buy-training-course

That being said; if you are in a State that doesn't confirm to IRS guidelines, then you might have different tax bases due to different depreciation rules. This is common, but may or may not be meaningful in your situation. Check with your tax accountants.

Cheers,

KP

Serge Wind
Title: Instructor, Department of Finance
Company: NYU School of Professional Studies
(Instructor, Department of Finance, NYU School of Professional Studies) |

Ron,

As Keith noted, the Proformative training course on “lease vs. buy” which I designed does address the need to include a cash flow line representing the tax depreciation shield – a positive net cash flow to the lessee, or intended user of the equipment or asset, under the purchase option in the financing decision. The tax depreciation shield – the annual depreciation expense for tax purposes multiplied by the lessee company’s marginal effective federal and state income tax rate – is a component of net cash flow (defined as net income plus depreciation expense), even though depreciation expense is a non-cash flow. A purchase of the asset results in an addition to fixed assets and higher depreciation expense. The latter expense is excluded from a post-tax net cash flow analysis, but the tax impact remains.

Accelerated depreciation for tax purposes, currently based on the Modified Accelerated Cost Recovery System (MACRS) mandated by Congress and the IRS for federal income tax purposes, serves to reduce taxes. Straight-line book depreciation for book purposes should not be utilized for cash flow analyses. The applicable tax rate should include the marginal state income tax rate if depreciation is tax deductible for state income tax purposes. However, as correctly noted by Keith, if your company is subject to state tax regulations in a state which doesn't confirm to IRS guidelines, you might have to use different tax bases due to different depreciation rules and varying marginal state tax rates. Also, include tax deductibility – especially the tax depreciation shield and the after-tax cost of debt as the appropriate discount rate – only if the company is subject to income taxes. Immediate tax protection for startups, which are typically in a pre-profit stage, is not applicable. Either set the tax depreciation shield to zero, or alternatively set the marginal tax rate to zero in the absence of taxes.

Separately, under the lease financing option, the lessee deducts the entire lease payment if the lease satisfies IRS criteria and can be classified as tax-oriented, or “guideline”.

The course is accessible at: https://www.proformative.com/courses/lease-vs-buy-training-course .

Regards,
Serge

Gerry Anderson
Title: President and Founder
Company: Logicon Solutions
LinkedIn Profile
(President and Founder, Logicon Solutions) |

Hi Ron,
The more recent models are starting to factor in tax planning calculations. In the past, modeling was all done 'pre tax'. Your model indicates it is a more current framework. You should talk with your tax experts/resources to ensure your cash flow does factor in those payments.

As for improving your excel expertice, check out http://www.mrexcel.com/. Odesk also has a good review. https://www.odesk.com/blog/2009/05/excel/

If you also want to factor in more comprehensive modeling, check out www.palisade.com

If you need anything else to improve your success, please let me know.

Kind Regards,
Gerry Anderson

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