Solution manual engineering economic analysis 9th edition ch12 after tã cash flows

This will affect the amount of taxes paid in any year, but with a stable income tax rate, the total taxes paid will be the same.. Combined federal and provincial tax = $57,150Combined in

Chapter 12: After-Tax Cash Flows12-1

(a) Federal Taxes

$11,540.00

Non-refundable tax credit=$8,00016%= $1,280.00

Federal taxes payable= $10,260.00 (b) Increase in federal taxes after increase of $16,000

Non-refundable tax credit=$8,00016%= $1,280.00

Federal taxes payable= $14,100.00

Increase in federal taxes= $3,840.00

$7,800.00

Non-refundable tax credit=$6,00016%= $960.00

Federal taxes payable= $6,840.00

Total taxes= $11,340.00

Federal taxes payable= $288.00

Federal taxes payable= $704.00

Federal Taxes:

$1,248.00Non-refundable tax credit=$6,00016%= $960.00

Federal taxes payable= $288.00

Federal taxes payable= $704.00

$12,200.00 Taxable

Non-refundable

Total Taxes Payable = $10,920.00

On the first

$

$ 2,019.19

$ 2,019.19

from $ 33,376.00 to $ 66,752.00 9.15% $ 3,053.90 $ 5,073.09 $ 2,893.60

surtax Surtax on Prov Tax over

$ 4,912.78

$3,685 20.0% $ 245.56

from $ 70,001.00 to $ 113,804.00 26.00% $11,388.78 $ 24,688.78 $ -

$3,520.00 Taxable

Non-refundable

Total Taxes Payable = $2,240.00

On the first $ 33,375.00 6.05% $ 2,019.19 $ 2,019.19 $ 1,331.00

Federal taxes payable= $10,920.00

Non-refundable tax credit=$8,000*16%= $1,280.00

Federal taxes payable= $2,240.00

Provincial taxes:

Taxes payable from personal income= $4,440.00

(ii-2) Corporate income (income=$43,000)

Combined tax rate=16.1%

Taxes payable from corporate income= $6,923.00

for different methods, the sum of the depreciation charges will be the same This will affect the amount of taxes paid in any year, but with a stable income tax rate, the total taxes paid will be the same (The difference is not the amount of the taxes, but their timing.)

12-9

Let ia = annual effective after-tax cost of capital

XYZ, Inc is paying:

Combined federal and provincial tax = $57,150

Combined incremental state and federal income tax rate = 22.1%+16%

= 38.1%

12-12

Combined incremental tax rate

= federal tax rate + provincial tax rate

12-13

(a) Bonds plus Loan

Year Before-Tax Cash

Flow

Taxable Income

Income Taxes

After-Tax Cash Flow

* taxed at 20%, the capital gain rate

After-Tax Rate of Return

$25,000 = $45,00 (P/F, i%, 5)(P/F, i%, 5) = 0.5556, thus the Rate of Return = 12.47%

Note: The Tax Reform Act of 1986 permits interest paid on loans to finance investments

to continue to be deductible, but only up to the taxpayer’s investment income

(b) Bonds but no loan

Year Before-Tax Cash

Flow

Taxable Income

Income Taxes

After-Tax Cash Flow

After-Tax Rate of Return

$75,000 = $2,500 (P/A, i%, 5) + $95,000 (P/F, i%, 5)

Try i = 7%, $2,500 (4.100) + $95,000 (0.7130) = $77,985

Try i = 8%, $2,500 (3.993) + $95,000 (0.6806) = $74,639

Using linear interpolation, Rate of Return = 7.9%

(a)

DATA Purchase Price

$ 4,096.32

DDB (%) 10% Net Salvage at Yr n = $ 4,096.32 SOTD (yrs)

Revenue Yr 1 $ 9,600.00 Land PurchaseP $ 9,000.00

ann Rev

$ 9,000.00

Expense yr 1 $ 600.00

Capital Gain(Loss) x TaxRate/2 = $ -

ann Exp inc $ -

Land NetSalvage at Yr n

Year Revenue Outlay or Expense Before-Tax Cash Flow CCA Taxable Income Income Tax After-Tax Cash Flow Loans, Land & WC

Total Tax Cash Flow

DATA Purchase Price

$ (27,823.68)

SOTD (yrs)

Revenue Yr 1 $ 9,600.00 Land PurchaseP $ 9,000.00

ann Rev

Expense yr 1

$ 600.00

Capital Gain(Loss) x TaxRate/2 =

$ 1,330.00

ann Exp inc $ -

Land NetSalvage at Yr n

Year Revenue Outlay or Expense Before-Tax Cash Flow CCA Taxable Income Income Tax After-Tax Cash Flow Loans, Land & WC

Total Tax Cash Flow

Taxable Income

Income Taxes at48%

After-Tax Cash Flow

Further calculations show actual rate of return to be approximately 4.5%

12-16

Year Before-Tax Cash

Flow

SOYD Deprec

Taxable Income

Income Taxes at20%

After-Tax Cash Flow

PW of Benefits – PW of Cost = 0

$19,000 (P/A, i%, 5) - $3,000 (P/G, i%, 5)

+ $5,000 (P/F, i%, 5) - $50,000 = 0

Taxable Income

Income Taxes at 40%

After-Tax Cash Flow

Taxable Income

Income Taxes

at 40%

After-Tax CashFlow

Taxable Income

Income Taxes at 34%

After-Tax Cash Flow

NPW at 10%

Thus the rate of return exceeds 10% (Calculator solution is 10.94%)

The project should be undertaken

Year Payment B n-1 Interest Principal Red Balance

Net ATCF -$20,000 $17,640.00 $5,346.96 $1,424.62 $290.04 $5,400.00 $11,650.00

IRR= 34.29%

(a) After-Tax Rate of Return = 34.3%

(b) The purchase of the special tools for $20,000 cash plus an $80,000 loan represents

a leveraged situation

Under the tax laws all the interest paid is deductible when computing taxable

income, so the after-tax cost of the loan is not 10%, but 5.4% The resulting rate of return on the $20,000 cash is therefore much higher in this situation

Note, however, that the investment now is not just $20,000, but really $20,000 plus the obligation to repay the $80,000 loan

0 $18,000.00 $15,000.00 $12,000.00 $9,000.00 $6,000.00 $3,000.00 Investment -$133,000

Net ATCF -$133,000 $24,000.00 $22,980.00 $21,960.00 $20,940.00 $19,920.00 $18,900.00 $17,880.00 $41,860.00NPW at 15% is negative (-$29,862) Therefore the project should not be undertaken

(Calculator solution: i = 8.05%)

Since AW<0, the investment is not desirable

GIVEN: First Cost = $18,600

Annual Cost = $16,000Salvage Value = $3,600Depreciation = S/L with n = 10, S = $3,600Savings/bag = $0.030

Cartons/year = 200,000Savings bag/carton = 3.5Annual Savings = ($0.03) (3.5) (200,000) = $21,000

$0 = -$16,740 + $3,250 (P/A, i*, 10) + $3,600 (P/F, i*, 10)

by trial and error method, i* = 16% per year

Fed + Alta rate = 29+ 10 = 39%

DATA Purchase Price

9

$ (6,921.14)

$ 83,0 78.8

6 SOTD (yrs)

Revenue Yr 1 $ 9,000.00 Purchase PLand $ 30,000.00

ann Rev

Expense yr 1

Capital Gain(Loss) x TaxRate/2 = $ -

ann Exp inc

Land NetSalvage at Yr

Year Revenue Outlay or Expense Before-Tax Cash Flow CCA Taxable Income Income Tax Cash Flow After-Tax

Loans, Land &

WC Total After-Tax Cash Flow

Net ATCF -$100,000 $26,500.00 $29,220.00 $27,996.00 $27,016.80 $26,233.44 $25,606.75

Payback period=3.6 years

12-32

For 2-year payback, annual benefits must be ½ ($400) = $200

(a) Before-Tax Rate of Return

$400 = $200 (P/A, i%, 4)

(P/A, i%, 4) = 2

Before-Tax Rate of Return = 34.9%

(b) After-Tax Rate of Return

CCA $2,100.00 $3,570.00 $2,499.00 $1,749.30Investment -$14,000

IRR= 11.98%

DATA Building Price

ann Exp inc

Land Net Salvage

Year Revenue Outlay or Expense Before-Tax Cash Flow Building CCA Machinery CCA Taxable Income Income Tax

After-Tax Cash Flow Loans, Land & WC Total After-Tax Cash Flow

OR $450,000.00 $450,000.00 $450,000.00 $450,000.00 $450,000.00 $450,000.00 $450,000.00 $450,000.00 CCA $351,000.00 $565,110.00 $344,717.10 $210,277.43 $128,269.23 $78,244.23 $47,728.98 $29,114.68 BTCF $99,000.00 -$115,110.00 $105,282.90 $239,722.57 $321,730.77 $371,755.77 $402,271.02 $420,885.32 Taxes $33,660.00 -$39,137.40 $35,796.19 $81,505.67 $109,388.46 $126,396.96 $402,271.02 $420,885.32 Net Profit $65,340.00 -$75,972.60 $69,486.71 $158,216.90 $212,342.31 $245,358.81 $136,772.15 $143,101.01 CCA $351,000.00 $565,110.00 $344,717.10 $210,277.43 $128,269.23 $78,244.23 $265,498.87 $277,784.31

Salvage

Net ATCF -$1,800,000 $416,340.00 $489,137.40 $414,203.81 $368,494.33 $340,611.54 $323,603.04 $14,616.22

IRR= 14.03%

(b)IRR= 26.13% (IRR>MARR, therefore it is a desirable investment)

OR $1,800.00 $1,800.00 $1,800.00 $1,800.00 $1,800.00 $1,800.00 $1,800.00 $1,800.00 $1,800.00 $1,800.00 CCA $1,000.00 $1,800.00 $1,440.00 $1,152.00 $921.60 $737.28 $589.82 $471.86 $377.49 $301.99 BTCF $800.00 $0.00 $360.00 $648.00 $878.40 $1,062.72 $1,210.18 $1,328.14 $1,422.51 $1,498.01 Taxes $320.00 $0.00 $144.00 $259.20 $351.36 $425.09 $484.07 $531.26 $569.01 $599.20 Net Profit $480.00 $0.00 $216.00 $388.80 $527.04 $637.63 $726.11 $796.88 $853.51 $898.81 CCA $1,000.00 $1,800.00 $1,440.00 $1,152.00 $921.60 $737.28 $589.82 $471.86 $377.49 $301.99 Investment -$10,000

Net ATCF -$10,000 $1,480.00 $1,800.00 $1,656.00 $1,540.80 $1,448.64 $1,374.91 $1,315.93 $1,268.74 $1,230.99 $1,683.98

(b) IRR=8.14%

(b) Capital Gain on land = $20,000 - $10,000 =$10,000

Tax on Cap Gain = 0.135 ($10,000) = $1,350

(c)

Calculation of net Salvage

Proceed S= $60,000.00Gain on disp.= $22,602.30Tax effect G= $6,102.62Net S= $53,897.38

0Gain on disp.= $1,670.00Tax effect G= $751.50Net S= $9,248.50

Two items worth noting:

1 The truck and the loan are independent decisions and probably should be

After-Tax Cash Flow

Where x = maximum purchase price for old building and lot

After-Tax Cash Flow

+$52,500 – 0.0123 P

Where P = maximum expenditure for new equipment

Solve the after-tax cash flow for P

Let x = number of days/year that the trucks are used

Annual Benefit of truck ownership = ($83 - $35)x - $1,100 = $48x - $1,100

Cash Flow Income at 50% Flow

A = Before-Tax Annual Benefit

After Tax Cash flow computation:

DATA Building Price P $ 110,000.00

Land Purchase

P

$ 45,000.00

SL (yrs) 27.5

DDB (%) SOTD (yrs) Building CCA rate

Machinery Purchase Machinery CCA

rate Machinery Salvage

Revenue Yr 1 $ 12,000.00

LandPurchase

P $ 45,000.00

ann Rev increase SalvageLand $ 75,000.00

Expense yr 1

CapitalGain (Loss)

x TaxRate/2 = $ 4,050.00

ann Exp inc

Land NetSalvage at

Yr n =

$ 70,950.00

CCA Straight Line

Year Revenue Outlay or Expense

Tax Cash Flow Taxable Income Income Tax SL Dep Taxable Income Income Tax After-Tax Cash Flow

Problem can only be solved through trial and error

Net ATCF -$14,500 $4,598.40 $4,705.15 $9,334.15

Therefore 222 days or more

12-50

Solving by trial and error

$ 6,487

$ 6,487 $ 6,487 $ 6,487

$ 6,487 $ 6,487

$ 6,487

$ 6,487

$ 6,487

$ (2,706) $

201,381 $ 3,328 $ 3,328 $ 3,328 $ 3,328 $ 3,328 $ 3,328 $ 3,328 $ 3,328 $ 3,328 $ 3,328 $ (6,447)

PW of X=

$ 228,301

AE of X=

$ 35,150

PW of Y= $ 219,570 AE of Y= $ 33,806 Select Lowest Cost which is Y

PW of

Y-X=

$ (8,731)

AEof X=

$ 1,344

IRR= 12.38% 12.38% 16.92% 16.18% 11.21%

NPW

0% $ 10 $ 4 $ 3 $ 8 $ 11 $ 11 1% $ 9 $ 4 $ 3 $ 7 $ 10 $ 10 2% $ 8 $ 3 $ 2 $ 7 $ 8 $ 8 3% $ 7 $ 3 $ 2 $ 6 $ 7 $ 7 4% $ 6 $ 2 $ 2 $ 5 $ 6 $ 6 5% $ 5 $ 2 $ 2 $ 5 $ 5 $ 5 6% $ 4 $ 2 $ 2 $ 4 $ 4 $ 4 7% $ 4 $ 1 $ 1 $ 4 $ 3 $ 4 8% $ 3 $ 1 $ 1 $ 3 $ 3 $ 3 9% $ 2 $ 1 $ 1 $ 3 $ 2 $ 3 10% $ 2 $ 1 $ 1 $ 2 $ 1 $ 2 11% $ 1 $ 0 $ 1 $ 2 $ 0 $ 2 12% $ 0 $ 0 $ 1 $ 2 $ (1) $ 2 13% $ (0) $ (0) $ 0 $ 1 $ (1) $ 1 14% $ (1) $ (0) $ 0 $ 1 $ (2) $ 1 15% $ (2) $ (1) $ 0 $ 0 $ (3) $ 0 16% $ (2) $ (1) $ 0 $ 0 $ (3) $ 0 17% $ (3) $ (1) $ (0) $ (0) $ (4) $ (0)18% $ (3) $ (1) $ (0) $ (1) $ (4) $ (0)19% $ (4) $ (1) $ (0) $ (1) $ (5) $ (0)20% $ (4) $ (2) $ (0) $ (1) $ (6) $ (0)

If MARR>17% do nothing

If 17%>MARR>6% Select E

If 6%>MARR Select F

Increment 2- 1 After-Tax Cash Flow

(c) Based on the rate of return of 9.2% from investing in Alt 2 instead of 1, note that the

increment is unacceptable Choose Alternative 1

(d) To maximize Net Future Worth, choose Alternative 1

(e) Because the 2- 1 increment has a B/C ratio less than 1, reject the increment and