Post Tax Principle is one of the basic principles of cash flow estimation. This is used to bring out the project cash flows with accuracy. After tax calculations are suggested by the Post Tax Principle for the project cash flow. There are some businesses that generally neglect the payment of tax while measuring the cash flow of a project.
Next, these businesses try to cover the fault by using the discount rate. These discount rates are very hard to adjust and thus the after-tax rate of discount and after-tax cash flows are used jointly. There are some important issues that are related to the Post Tax Principle and its application.
These issues are the following:
Tax Rate: There are two different tax rates termed as the average tax rate and the marginal tax rate. The average tax rate is considered as the entire tax as a proposal of the overall earning from the business. On the other hand, the marginal tax rate represents those taxes that are imposed on the earnings at margin.The tax rates are often found as progressive and because of this, the average tax rates are always lower than the marginal tax rate.
The firms run some particular projects and the income from these projects are considered as marginal because this income is a kind of additional income as the existing assets of the firm are the main source of income. Because of this, the payable taxes on the project are estimated through the marginal tax rate, as it is the most appropriate rate to do that.
Handling the Losses: The post tax principle holds that there remains possibility of losses for both the firm as well as the particular project. There are several ways of minimizing these losses. In certain situations, the tax saving is postponed until the firm or the particular project makes profit.
Non-Cash Charges: The post tax principle also holds that whenever the tax liabilities are affected by the non-cash charges, the project cash flow estimation will be affected. Depreciation is one of these non-cash charges.
Last Updated on : 27th June 2013