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Chapter 17
After-Tax Economic
Analysis
Slide Sets to
17-1
2005 by McGraw-Hill,
LEARNING OBJECTIVES
1. Terminology
and rates
6. Spreadsheets
7. After-tax
replacement
3. Taxes and
depreciation
8. Value-added
analysis
4. Depreciation
recapture and
capital gains
9. Taxes outside
the United
States
5. After-tax
analysis
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17-2
2005 by McGraw-Hill,
Income Tax
The total amount of money
transferred from the
enterprise to the various
taxing agencies for a given
tax year.
Federal corporate taxes are
Fees,
Rent,
Royalties,
Sale of assets
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2005 by McGraw-Hill,
Terms - continued
Operating Expenses
Taxable Income
Calculated amount of
TI = GI E D
Utilities
Other taxes
Material expenses
etc.
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2005 by McGraw-Hill,
Terms - continued
Net Profit After Tax (NPAT)
Tax rate T
A percentage or decimal
equivalent of TI.
= (TI)(1-T)
Equivalent tax rate Te combines
federal and local rates:
x (applicable rate)
= (TI)(T).
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Tax Rate
(1)
Filing Single
(2)
Filing Married
and Jointly (3)
0.10
0-7,000
0-14,000
0.15
7,001-28,400
14,001-56,800
0.25
28,401-68,800
56,801-114,650
0.28
68,801-143,500
114,651-174,700
0.33
143,501 311,950
174,701-311,950
0.35
Over 311,950
Over 311,950
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2005 by McGraw-Hill,
other income
Taxable Income
TI = GI personal exemptions standard or
itemized deductions
Tax
T = (taxable income)(applicable tax rate)
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salvage value
= GI E P + S
Add Depreciation
CFAT = GI E P + S (GI E D)(Te)
An evaluation format
See Table 17 3 and Example 17.3 for a computational format
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DR Summary - Outcomes
If SP at time of sale is..
CG
SP1
First Cost P
CG: Taxed at Te
after any CL offset
plus
SP2
DR
DR: taxed at Te
DR
Book Value BVt
CL
SP3
Zero, $0
DR occurs when a productive asset is sold for more than its current BV
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17-11
2005 by McGraw-Hill,
TI = GI E D + DR + CG CL
The basic spreadsheet format is
Year
GI
DEPR
BV
TI
Taxes
0
1
2
n
See Figure 17-4 and associated Example 17.6
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17-12
2005 by McGraw-Hill,
exceeded
value
Assume discounting occurs at the firms after-tax
MARR rate
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2005 by McGraw-Hill,
ROR Analysis
The Before-tax ROR
after-tax ROR
Before Tax ROR =
1-Te
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Warnings . . .
Always beware of using the ROR method for
selecting from among alternatives.
DO NOT use computed ROR!
This means the ROR computed on each separate
investment alternative.
Rather, form the incremental cash flow and make a
determination on the i* value.
Slide Sets to
17-19
2005 by McGraw-Hill,
consumer or buyer.
Popular concept in
Europe;
Value-added taxes are
imposed in Europe on
certain products and
paid to the
government.
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Rule:
The decision concerning
an economic alternative
will be the same for a
value added analysis
and a CFAT analysis.
Because, the AW of
economic value added
estimates is the same as
the AW and CFAT
estimates!
17-20
2005 by McGraw-Hill,
Value Added
To start, apply Eq. 17.3:
NPAT = Taxable Income
taxes
NPAT = (TI)(1-T)
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2005 by McGraw-Hill,
Value Added
Recall, firms often have
two sets of books relating
to depreciation:
One for tax purposes and,
One for internal
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2005 by McGraw-Hill,
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Mexico
SL method with inflation indexing
Assets generally classified with annual
recovery rates that vary
5% for machinery to 100% for environmental assets
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2005 by McGraw-Hill,
Japan
Depreciation SL or DB with 95% of the
unadjusted basis used
Class and life 4 to 24 years by law; up to 50
years for certain structures
Expenses are deductible
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17-25
2005 by McGraw-Hill,
Chapter Summary
After-tax (AT) analysis is a more thorough approach
in the evaluation of industrial projects
In some cases, AT analysis will show a reversal in
before-tax decision, but not always
Tax rates in the US are graduated higher taxable
incomes pay higher taxes
Operating expenses are tax deductible
Depreciation amounts represent non-cash flows -but do generate tax savings
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2005 by McGraw-Hill,
Summary - continued
In the US, the MACRS method is required on federal
corporate tax returns and recovery lives are mandated
by law and by class
In replacement analysis, the impact of depreciation
recapture, capital gain or loss is incorporated into the
analysis
For AT replacement, the decision to replace will
generally follow the before-tax analysis
AT replacement will show substantially different CFAT
than the before-tax analysis
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2005 by McGraw-Hill,
Chapter 17
End of Set
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2005 by McGraw-Hill,