Income Taxes in Capital Budgeting Decisions

After-tax benefit:
The amount of net cash inflow realized from a taxable cash receipt after income tax effects have been considered. The amount is determined by multiplying the taxable cash receipt by (1 - Tax rate).

After-tax cost:
The amount of net cash outflow resulting from a tax-deductible cash expense after income tax effects have been considered. The amount is determined by multiplying the tax-deductible cash expense by (1 - Tax rate).

Capital cost allowance (CCA) tax shield:
A reduction in the amount of income subject to tax that results from the presence of capital cost allowance deductions on the income statement. The reduction in tax is computed by multiplying the capital cost allowance deduction by the tax rate.

Capital gain:
When the selling price of an asset exceeds its original cost, the excess is called a capital gain. The portion of this gain subject to tax is 75%.

Coefficient of variation:
A relative measure of a project's dispersion calculated as the ratio of a project's standard deviation to its expected value.

Correlation:
A number ranging from +1 to –1 that is a statistical measure of the degree of association of the returns of one project to those of another.

Profitability index:
The ratio of the present value of a project's cash inflows to the investment required.

Recapture:
A negative undepreciated capital cost (UCC) balance for any pool or asset class. It is a recapture of previously claimed CCA and occurs when proceeds from dispositions exceed the predisposal UCC balance. This amount is fully taxable.

Sensitivity analysis:
An analysis of the effect that changes in a project's input variables may have on its net present value or internal rate of return.

Stnadard deviation:
A statistical tool used by the management accountant to determine the amount of variation in a project's actual returns from the project's expected returns.

Terminal loss:
The positive undepreciated capital cost (UCC) balance after all assets of a pool have been disposed of. This amount is fully deductible against other income.

Undepreciated capital cost (UCC):
The remaining book value of an asset class or pool of assets that is available for tax-deductible depreciation (capital cost allowance). The maximum amount of capital cost allowance that can be deducted in a taxation year of a particular CCA class is the UCC multiplied by the CCA rate for that asset class.