Advanced Corporate Income Tax
Category: Business and Money > Accounting
Asked by: sljames822-ga
List Price: $2.00
28 Sep 2005 07:27 PDT
Expires: 28 Oct 2005 07:27 PDT
Question ID: 573694
Do decision makers need to consider the time value of money when evaluating transactions with cash inflows and outflows occurring in the same period?
Re: Advanced Corporate Income Tax
Answered By: omnivorous-ga on 28 Sep 2005 08:15 PDT
Sljames822 -- Financial budgeting typically simplifies a business model and assumes that cash flows are even. But there is a cost (or a profit) depending on the cash balances. Indeed corporate financial managers today even sweep cash balances automatically into overnight deposits to earn extra money on "repo" or "repurchase agreements" -- Investopedia "Repurchase Agreement" http://www.investopedia.com/terms/r/repurchaseagreement.asp Ideally, you'd set up every problem on a daily basis -- but the complexity would be overwhelming. There are multiple examples of situations where a rough financial model assumes certain payments are made in the same period -- but a cash manager would have to borrow money (perhaps at very high short-term rates) if cash flow weren't positive: * we generally assume taxes are paid annually at year-end, when in fact the corporation pays them quarterly * in a rental situation you would probably set up income & maintenance as annual line items. However, treating them in the same period ignores the fact that rents get paid monthly -- and timing of maintenance expenses during the year would be very important. * payment of dividends on bonds is typically calculated on an annual basis by the corporation. But as bond investors know, there's a difference in yield-to-maturity depending on whether the bond is paid annually, semi-annually or quarterly. And it's all because of the time value of money. Google search strategy: Investopedia "repurchase agreements" Best regards, Omnivorous-GA
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