University Finance Report: Tax Incentives and Project Valuation

This finance report addresses two key questions related to capital investment and valuation. The first section examines the impact of tax incentives, specifically the Mineral and Exploration Tax Credit in Manitoba, on new exploration activity. It explains how such incentives can affect a company's cash flows and increase the Net Present Value (NPV) of a project. The second part of the report delves into the mechanics of Economic Value Added (EVA), comparing and contrasting it with NPV as a capital budgeting and valuation tool. It explains how EVA measures economic profit and highlights the differences in implementation between EVA and NPV, particularly regarding the consideration of the time value of money and the incorporation of opportunity costs. The report concludes by emphasizing the importance of both methods in assessing project viability and making informed investment decisions.

Running head: FINANCE
Finance
Name of the Student:
Name of the University:
Author’s Note:

Table of Contents
In Response to Question 1...............................................................................................................3
In Response to Question 2...............................................................................................................3
Reference.........................................................................................................................................5

In Response to Question 1
The Mineral and Exploration Tax Credit for the year 2002 gave a 30% non-refundable
personal income tax credit facility for the Manitoba resident when they invest or purchase
securities which qualifies as a mineral exploration company as a key company by the
government. The new exploration activity will affect the cash flows of the company by the net
tax credit availed that will increase the cash flow flowing from the project. The net tax credit will
increase the annual cash flow and simultaneously the Net Present Value from the project. The
return generated from the project will be higher than the expected rate of return from the project.
The tax incentive will increase the net after tax cash flows, as the income will be tax exempt,
which will increase the net return generated from the project investment (Smit and Trigeorgis
2017).
In Response to Question 2
NPV is the evaluation of the cash flows accruing from a project and the return generated
from the project after incorporating the initial investments and annual cash flows from the same.
However, the EVA shows the economic profit for the company, which shows the financial
performance of the company after incorporating the cost of capital for the company and the net
tax, which will be adjusted on a cash basis. The EVA considers the accounting period data and
then sums up the same. However, the NPV does not consider the accounting data and globally
and takes the overview of the investment. The other key factor why both the NPV and EVA
differs in the implementation of the same is due to the incorporation of the time value of money
taken in the net present value calculation which discounts the annual cash flows received from
the company and the actual value created by the investments done. Both the EVA and the NPV

acts as a key evaluation measurement tool for the investment decision taken to assess the
financial viability of the project. The usage of the NPV method helps the company incorporate
the required rate of return and after tax cash flow, accruing for the investors and the relevant
profitability of the project, which is more accurate way for evaluation. The key differentiating
factor which is provided by the EVA is the application of the opportunity cost into the valuation
while the other valuation methods like NPV does not which marks the key difference for the
valuation tools (Moshövel et al. 2015).

Reference
Moshövel, J., Angenendt, G., Magnor, D. and Sauer, D.U., 2015, September. Tool to determine
economic capacity dimensioning in PV battery systems considering various design parameters.
In Proceedings of the 31st European Photovoltaic Solar Energy Conference and Exhibition (EU
PVSEC) 2015 (pp. 1639-1644).
Smit, H.T. and Trigeorgis, L., 2017. Strategic NPV: Real Options and Strategic Games under
Different Information Structures. Strategic Management Journal, 38(13), pp.2555-2578.