Noncash Items: Impact of Taxes on Cash Flows

To accurately identify the cash flows generated from an SA, it is important to remember to consider tax implications. Cash flow projections should reflect after-tax values to present a more accurate picture of the ultimate value derived from a Strategic Alternative. This requires the adjustment made in Exhibit 10-2.

Exhibit 10-2: Cost-benefit analysis.

Benefits

Less: costs

Net benefits

Less: taxes (net benefits tax rate)

Plus: noncash charges

Cash flow

Let's illustrate using our supply chain management system implementation (see Exhibit 10-3). The annual cash flow derived from the system is $9 million. There are two methods of calculated tax impact and hence the cash flow. Let's use the method above that assumes the noncash charges are included in the initial tax estimate. Assume that total expenses are $17 million, where $12 million is operating costs plus $5 million in noncash charges. Noncash charges were spread over six years (investment costs of $30 million divided by six). You would simply add the noncash charges that are already included in the cost.

Exhibit 10-3: Cash flow.

Noncash Charge Included in Costs	(rounded to the nearest million)
Benefits: Saving on inventory handling	$23
Less: Costs (operating cost plus reengineering)	$17
Net benefits	$6
Less: taxes (net benefits tax rate)[*]	$2
Plus: noncash charges	$5
Cash flow	$9
Noncash charges included in costs
Benefits: saving on inventory handling	$23
Less: costs (operating cost plus reengineering)	$12
Net benefits	$11
Less: taxes (net benefits tax rate)[*]	$4
Add: noncash charges tax rate	$2
Cash flow	$9
[*]Tax rate is 32 percent.

If noncash charges are not included in costs, the calculation involves adding the product of noncash charges to the difference between benefits less costs and taxes ($6 million times a tax rate of 32 percent).