(a)
The after-tax cash flow for 10-year project life.
Answer to Problem 39P
The after tax cash flow for
Explanation of Solution
Given data:
Investing amount is
Estimate gross income is
Increment per year is
Expenses are
Increment per year is
Time period is
Combined income tax rate is
Concept used:
According to MACRS the rate of depreciation is shown below.
Year | MACRS Depreciation rate |
6 | |
7 | |
8 |
Write the expression to calculate the taxable income.
Here before tax cash flow is
Write the expression to calculate the tax to be paid.
Write the expression to calculate the after tax cash flow.
Calculation:
Calculate the depreciation.
Year | Cost basis |
MACRS Depreciation rate |
Depreciation |
6 | |||
7 | |||
8 |
Write the expression to calculate before tax cash flow.
Substitute
Calculate the before tax cash flow for
Year | Gross income | Expenses | Before tax cash flow |
0 | |||
1 | |||
2 | |||
3 | |||
4 | |||
5 | |||
6 | |||
7 | |||
8 | |||
9 | |||
10 |
Calculate the taxable income for the first year.
Substitute
Calculate the tax for the first year.
Substitute
Calculate the after tax flow cash for the first year.
Substitute,
Similarly calculate the value for 10 years and enter them in the table below.
Year | Before tax cash flow | Depreciation | Taxable Income | Tax | After Tax Cash Flow |
6 | |||||
7 | |||||
8 | |||||
9 | 0 | ||||
10 | 0 |
Calculate the total ATCF.
Conclusion:
Thus, the after tax cash flow for
(b)
The after rate tax return.
Answer to Problem 39P
The after rate tax return is
Explanation of Solution
Calculate the after tax
Write the expression for after tax rate of return.
Here, the present value of the annuity is
Substitute
Solve Equation (V) and calculate the value of
Conclusion:
Thus, the after rate tax return is
(c)
The rate of return for at the end of fifth year.
Answer to Problem 39P
The rate of return in this case is
Explanation of Solution
Given data:
Selling price is
Calculation:
Calculate the
Year | Cost basis |
MACRS Depreciation rate |
Depreciation |
Calculate before tax cash flow
Year | Gross incomea | Expensesb | Before tax cash flowc |
0 | |||
1 | |||
2 | |||
3 | |||
4 | |||
5 |
Calculate after tax cash flow.
Year | Before tax cash flow | Depreciation | Taxable Income | Tax | After Tax cash Flow |
Write the expression for after tax rate of return.
Here, the present value of the annuity is
Substitute
Solve Equation (II) and calculate the value of
Conclusion:
Thus, the rate of return in this case is
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Chapter 12 Solutions
ENGINEERING ECO ANALYSIS W/STUDY GUIDE
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