Abstract
This paper describes tax cash flows, the tax payments associated with cash returns and the tax savings from capital allowances associated with capital expenditure upon plant and machinery. The post-tax net present value (NPV) of capital equipment proposals is then evaluated at the post-tax cost of capital, which is taken from a companion paper. A numerical example of the post-tax yield (internal rate of return) illustrates the crucial importance of incorporating the effects of a company's capital gearing ratio into financial evaluation procedures. An expression is derived for the ratio of the post-tax NPV to the pre-tax NPV as a function of the project duration, profitability and the capital structure of the company. The post-tax-pre-tax ratio is not just 65 per cent for the current 35 per cent rate of corporation tax, and it is seen to vary over a very wide range. Understanding the nature of such tax distortion will help the engineer to undertake realistic post-tax appraisals of capital projects.