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FAQ
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What is the difference between the US and International versions? |
| Answer: |
The difference is related to how tax depreciation is calculated. The US uses a method known as modified accelerated cost recovery system (MACRS), which defines both the recovery period and the amount that can be written off each year.
Other jurisdictions tend to use double-declining, straight-line, or sum-of-years’ digits methods for tax depreciation. These methods apply a formula to calculate the amount of depreciation each year.
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| Question: |
Will there be updates when tax depreciation changes take place? |
| Answer: |
Whenever there are changes to depreciation rates or methods, the CapPlan programs will be adjusted to reflect the changes. You will be advised by e-mail to download the patch that contains the changes.
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| Question: |
How accurate are the calculations in CapPlan ? |
| Answer: |
The programs in CapPlan perform the calculations accurately. However, the accuracy of the calculations is only as good as the figures that go into them. If you have any doubt about your input values, you should repeat the analysis several times. In this way, you will be able to determine just how sensitive your analysis is to changes in the inputs.
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| Question: |
What are the differences between the Standard, Small Business Professional, and Enterprise versions of CapPlan ? |
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Essentially, the difference is in the number of software applications and additional resources that are available. The Standard version has 6 programs, the SBP version has 10 programs, and the Enterprise version has 13 programs.
To get a clearer description of the differences between the three versions, go to the version comparison page on the site.
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| Question: |
How is depreciation a cash flow item? |
| Answer: |
Depreciation is a non-cash expense that can be used to reduce taxable income. A reduction in taxable income leads to a reduction in taxes payable. It is this reduction in taxes payable that becomes the cash flow associated with depreciation.
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| Question: |
Why is the emphasis on after-tax cash flows? |
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Cash flows, rather than accounting figures, are used because cash flows affect a firm’s ability to pay bills and purchase assets. And it is the after-tax cash flows that are available to do this.
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| Question: |
What is the difference between an expansion project and a replacement project? |
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For expansion projects, the relevant cash flows are the after-tax outflows and inflows associated with the proposed investment. For replacement projects, the appropriate cash flows for analysis are the incremental cash outflows and inflows that would result from the proposed replacements.
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| Question: |
Isn’t payback easier to understand than other evaluation methods? |
| Answer: |
Yes, it is. Everyone understands that the payback period is the length of time it takes to recover the initial investment. Any other method is going to be more involved and more difficult to explain.
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| Question: |
What are the advantages and disadvantages of using the payback period? |
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Payback has several advantages. First, it is simple to calculate. Second, it is easy to understand and explain. Third, it is a rough indicator of the level of risk in a project, because projects that payback sooner are often viewed as being more liquid and, therefore, less risky than those with longer payback periods.
At the same time, payback has three distinct disadvantages. First, the choice of a maximum acceptable payback period is arbitrary. Second, it does not take into account the timing of cash flows. Third, it does not deal with any cash flows beyond the payback period.
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| Question: |
What is annualized net present value (ANPV) and why is it included in the analysis done by CapPlan ? |
| Answer: |
If you are comparing two or more projects with unequal lives, you need to convert the original NPVs to yearly net present value figures. The effect is to assume the existing projects will be repeated over and over, with the result that the NPV can be stated as a yearly figure. This yearly figure is the ANPV.
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| Question: |
What is the difference between an operating and financial lease? |
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An operating lease is a short-term arrangement that can be cancelled at the option of the lessee. It is often used to finance office equipment, cars, and other assets that require periodic maintenance. Generally, the lessor is responsible for all service, as well as any insurance or property taxes on the asset.
A financial lease is a long-term noncancellable contract between the lessor and lessee. It fully amortizes the lessor’s cost for equipment. Under this form of lease, service and maintenance are usually provided by the lessee. Further, the lessee may have to provide insurance and pay property taxes
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| Question: |
What procedure should a lessor follow when setting lease rates? |
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In a leasing arrangement, the lessor wants to set a rate that provides a satisfactory return. This is done by first focusing on four items:- The lessor’s after-tax required rate of return.
- The lessor’s tax rate.
- The cost of the leased asset.
- The depreciation expense available.
Once these items have been determined, the lease rate can be set by following 5 steps:
Step 1: Determine the value of the depreciation expense from owning the asset.
Step 2: Calculate the present value of the depreciation expense.
Step 3: Calculate the amount that needs to be recovered in lease rates. This amount is the difference between the cost of the asset and the present value of the depreciation expense.
Step 4: Calculate the after-tax lease payment
Step 5: Calculate the before-tax lease payment.
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| Question: |
What influences lease rates set by the lessor? |
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Other things being equal, the following will cause lease rates to rise:- Using depreciation methods that reduce the amount of depreciation expense over the earlier years of a lease. For example, using straight line depreciation over MACRS in the US or straight line over CCA methods in Canada.
- Increasing the required rate of return (the discount rate).
- Increasing the number of payments by going to semiannual, quarterly, or monthly payments instead of yearly payments.
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| Question: |
What do you think of the statement: “By leasing I am able to increase my firm’s debt capacity”? |
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This statement assumes that bankers, other lenders, and financial markets are naïve and do not recognize that leasing puts a financial obligation on a firm or individual, just as borrowing does. There is no evidence that these institutions are that naïve.
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| Question: |
How do you calculate the annual percentage cost of a lease? |
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To determine the percentage annual cost of a lease, we have to solve for the internal rate of return. In other words, we have to solve for the discount rate that makes the present value of the lease payments equal to the net cost of the asset. In essence, it becomes a trial and error exercise in calculating the rate of return.
If this were done manually, it would introduce new dimensions in boredom. Fortunately, CapPlan contains a program called the Cost of Leasing which performs these calculations.
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