How to Calculate After-Tax Cash Flows for Lease Payments

Investors calculate after-tax cash flows to help determine cash available.

The after-tax cash flows of lease payments will apply to the company receiving lease payments. These payments are income, so the company will need to pay tax on them. This calculation will require the company's effective tax rate. The effective tax rate is the average rate at which the company pays tax on income. You need the effective tax rate because the actual tax rate varies based on levels of income due to the progressive tax system in the United States.

Things You'll Need

• Prior year's tax statement

Instructions

1. Divide your prior year's tax paid by your income to find your effective tax rate. For example, a company paid $30,000 on $100,000 of income, so $30,000 divided by $100,000 equals 30 percent.

2. Add together lease payments. In the example, the company makes $8,000 each month in lease payments.

3. Subtract the effective tax rate from one. This calculates how much of your income you keep. In the example 1 minus 0.3 equals 0.7.

4. Multiply your lease payment you receive by the number calculated in Step 3. In the example, $8,000 times 0.7 equals $5,600. So for each lease payment, cash will increase $5,600 after taxes.

References

• Investor Words: Effective Tax Rate Definition
• Miller Geltner SW Learning: Cash Flow Analysis