(A) Before-Tax Cash Flow (BTCF) (B) Depreciation Deduction (D) = -t(C) Cash Flow for (E) = (A) + (D) After-Tax Cash Flow (ATCF) (C) = (A) – (B) End of Year, k Taxable Income (TI) Income Taxes Сapital investment Capital investment 1 2 Ordinary income is positive (or negative) in sign positive in sign) or positive in sign -t (TI) (opposite in sign from TI) After-tax cash Depreciation TI can be negative flows from operations N Market value N MV – BV* -t(MV – BV) MV-t(MV-BV) (MV) Before-Tax IRR, PW, and so on (Computed from Col. A, using the before-tax MARR) *BV = book value at end of year N After-Tax IRR, PW, and so on (Computed from Col. E, using the after-tax MARR) Figure 7-5 General Format (Worksheet) for After-Tax Analysis; Determining the ATCF

A company is considering the purchase of a capital asset for $100,000. Installation charges needed to make the asset serviceable will total $30,000. The asset will be depreciated over six years using the straight-line method and an estimated salvage value (SV6) of $10,000. The asset will be kept in service for six years, after which it will be sold for $20,000. During its useful life, it is estimated that the asset will produce annual revenues of $30,000. Operating and maintenance (O&M) costs are estimated to be $6,000 in the first year. These O&M costs are projected to increase by $1,000 per year each year thereafter. The after tax MARR is 12% and the effective tax rate is 40%. Solve, a. Use the tabular format given in the shown Figure to compute the after-tax cash flows. b. Compute the after-tax present worth of the project, and use a uniform gradient in your formulation. c. The before-tax present worth of this asset is –$50,070. By how much would the annual revenues have to increase to make the purchase of this asset justifiable on a before-tax basis?