- September 16, 2021 at 8:54 pm #635847AshleyMarc1997Member
- Topics: 48
- Replies: 24
Should we include the before-tax PV of Cash flows or after-tax PV of Cash flows to calculate the sensitivity of sales?
I know that Contribution should be after-tax (tax should be deducted) but what about PV of other Cash Flows?
I had a question in the exam where after-tax sales were being given with the tax rate of 30% & we were asked to calculate sensitivity analysis of Sales. So I could not understand that why do we take the after-tax sales for calculation because tax is charged on operating profits or contribution but not on sales!!!
Please tell me what is the way that we calculate? I know that somebody asked you this before but I could not understand your answer on another thread.September 17, 2021 at 8:15 am #635869John MoffatKeymaster
- Topics: 56
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You do calculate it on the after-tax sales.
If the sales revenue falls by $1, then the profit will fall by $1 as well. If the profit falls by $1 then the tax will fall by 30% x $1.
Therefore the net cash flow will fall by $1 – $0.30 = $0.70 (of 70% of the sales)
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