Let's say that the rights to Frederico John Michael's masterpiece “the paintings” are to be auctioned. You forecast that you can collect annual cash flows in the form of royalties, net of taxes, as shown in the table below.  At the end of the forecast horizon, you plan to sell the rights in a future auction.  You forecast you can get $1,750,000 for the rights, after taxes, at the end of year 5.  If your target rate of return is 12%, what is the maximum price you should offer for the rights?   Year 1 2 3 4 5 Annual Cash Flow $350,000 $380,000 $400,000 $450,000 $480,000 Auction Proceeds         $1,750,000

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Deferred Tax

Deferred tax is an estimated future tax which is made while preparing accounts. It is estimated as a result of past and present transactions in the financial statements. It is not the actual tax which needs to be paid or refundable from the revenue authority, it is an accounting entry. It exists because of the difference between accounting profits and taxable profits.