Home  Journals  Financial Analytics: Science and Experience  11(293) - 2016 March

An impact of value added tax on the effect of the economically standalone project with incorporation of a separate legal entity

Vol. 9, Iss. 11, MARCH 2016

Article PDF Version

Received: 14 January 2016

Accepted: 17 February 2016

Available online: 27 March 2016

Subject Heading: INNOVATION AND INVESTMENT

JEL Classification: D92, G31, G38

Pages: 2-11

Importance The research investigates how taxes influence corporate operations and result in various financial models, which allow optimizing tax policies of a certain corporation.
     Objectives The research demonstrates that not only income tax has a significant influence on financial decisions; reflects how VAT influences the project effect; shows that the tax will provide the opportunity only if the project is economically separated, with the incorporation of the separate legal entity.
     Methods The project effect is evaluated in three steps, considering VAT: formation of the project cash flow, assessment of its Net Present Value net of VAT, consideration how VAT influences the project NPV. This effect can be assessed using the Internal Rate of Return (IRR), with and without VAT.
     Results The article demonstrates that Value Added Tax reduces the project effect through NPV, and it can possibly increase VAT. It results in considerable reduction of the project IRR.
     Conclusions and Relevance VAT reduces the project effect and changes our understanding of initial capital needs for financing purposes. The findings may help business proprietors, top executives and financial analysts to more accurately plan cash flows from investment and innovative projects and evaluate their efficiency.

Keywords: project effect, value added tax

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