Create a 12 page essay paper that discusses Corporate Finance.
Depreciation is an irrelevant cost when a capital budgeting technique such as a Net Present Value (NPV) is used. NPV only uses appropriate cash flows in the calculation, depreciation is not cash flow, hence it is added back to the accounting profit to adjust and show the real cash position of a particular project. The only issue that is relevant to the NPV of a project is the Capital allowance that any particular asset or a project attracts. The capital allowance is usually a relevant cost that needs to be worked upon the during the NPV calculation. Capital allowances are used to reduce taxable profits. hence they would reduce the tax payments. This reduction in tax payments due to the capital allowances is treated as cash saving from the acceptance of a particular project or a purchase of any particular asset in a project. These capital allowances are calculated as per the tax authorities and it is further multiplied with the tax rate to ascertain the tax saving from the acceptance of a project. The relevant tax savings of each year are added upon in the cash inflows of that particular year. The remaining value or the left over balance is regarded as the balancing allowance. Depreciation on the other hand only relates to accounting information. Depreciation is calculated using different methods. The most common methods are the Straight Line Method and the Reducing balance method. (Baxter, 1971. Murray, 1971)
Options are derivative instruments that give the owner the right and not the obligation to fix a future price. These options are designed in such a manner so at to reduce the risk of the owner when the markets are deemed to fall in the future. “Options are essentially securities and provide the holder with the right to trade an asset on certain time and value. On the other hand, the holder is not bound to do the trade and the whole process of trading depends on the opinion of the holder” (Maps of World.com). There are two broad categories of options.