CTC 475 Review

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CTC 475 Review

• Taxes
• Types of taxes
• Income tax is graduated
• ATCF
• Calculate Depreciation
• BTCF-DepreciationTI
• TaxTItax rate
• ATCFBTCF-Tax

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CTC 475

• ATCF/EVA

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Objective

• Know how to develop an ATCF and EVA cash flow
• Know the relationship between before- and
  after-tax MARR

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Tax Concepts

• Depreciation is not a cash flow but is needed to
  determine taxes
• Interest on borrowed money is a cash flow and is
  also needed to determine taxes

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Interest

• Can finance a project with equity (owners funds)
  or debt (borrowed funds)
• If money is borrowed principle and interest must
  be repaid
• Interest is a cash flow and affects taxable
  income
• Principle is a cash flow but does not affect
  taxable income

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Methods for borrowing money

• Periodic payment of interest with all principle
  being repaid at end of repayment period.
• Uniform payment of principle.
• Uniform payment (principle and interest).
• Pay nothing until end of repayment period.

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Example Problem-Method 1-4

• Borrowed amount 40K
• 18 per year compounded annually
• Repayment period-5 years

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Method 1-Pay Interest Periodically
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Method 2-Pay Principal Periodically
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Method 3-Uniform Payment
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Method 4-Pay All at End
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Example Problem-ATCF

• Cost Basis 82K
• 42K equity
• 40K borrowed at 18 per year over 5 years equal
  payments
• Salvage Value 5K
• Estimated useful life 7 years
• MARR15
• Reduction in expenses 23.5/yr
• Depreciate using MACRS-GDS
• 5-year property
• Determine PW of BTCF ATCF

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PW of BTCF

• PW17,649 (BTCF)
• PW3,010 (ATCF-depreciation only and assuming
  equity used for original costs)

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ATCF-Calculate Depreciation
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Calculate Payment Size

• Assume method 3 (uniform payment)
• Payment Size, A40,000(A/P18,5)
• Payment size 12,792

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Calculate Interest Principle
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(No Transcript)
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PW of ATCF

• Must take each year back to zero (no series
  because each year has a different number)
• PW-42K10,743(P/F15,1)13,746(P/F15,2)
• 9,774(P/F15,3)7,156(P/F15,4)
  5,695(P/F15,5)17,116(P/F15,6)
  15,510(P/F15,7)3,300(P/F15,7)
• PW of ATCF6,010 (cost effective and more cost
  effective than if company had funded 100 with
  equity)

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See Book page 329
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Dont include interest in ATCF

• Double counting because interest rates should be
  included in the determination of MARR
• MARRgtWACC (weighted average cost of capital)
• Debt Capital (bonds interest on borrowed money)
• Equity Capital (stocks, money on hand)

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Before/After Tax MARR

• AT MARRBT MARR(1-effective income tax rate)
• Given BT MARR15
• Calculate AT MARR (34 tax rate)9.9
• Calculate AT MARR (40 tax rate)9.0
• Calculation exact if no depreciation, tax
  credits, etc. (otherwise, just an estimate)

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Economic Value Added-EVA

• EVAkNOPATk-MARRBV(k-1)
• NOPAT-Net Operating Profit After Taxes
• K is the year of interest
• MARR is minimum attractive rate of return
• BV is book value

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EVA

• Annual equivalent worth of EVA is equal to AW of
  ATCF

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EVA Example-page 343

• Cost Basis 84K
• Salvage Value 0
• Estimated useful life 4 years
• AT MARR12
• Annual expenses 30K/yr
• Gross revenues70K/yr
• Depreciate using Straight Line
• Tax Rate50
• Determine AW of ATCF and EVA

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ATCF
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AW of ATCF

• AW-84,000(A/P12,4)30,5002,844

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EVA Calculation
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AW of EVA

• PW-580(P/F12,1)1,940(P/F12,1)4,460(P/F12,3)
  6,980)P/F12,4)
• AWPW(A/P12,4)2,844

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Next lecture

• Dealing with Uncertainty
• Sensitivity
• Optimistic-Pessimistic