After-Tax Examples

October 30, 2013

Your company is about to buy a Plebney Analyzer for $120,000. There is some ambiguity in Revenue Canada’s rules: the analyzercan either be depreciated at 20% per year or at 35% per year.

Which would you prefer, and what is the difference in present valueof the after-tax first cost?

Your company is taxed at 50%, and your after-tax MARR is 10%.

You expect to be able to sell the analyzer in 5 years for $60,000.What is the after-tax present worth of the salvage income foreach depreciation rate?

We spend $100,000 on a machine. It brings in an additional $25,000 a year in income but costs $5,000 a year to operate. After 10 years we sell it for $10,000. RevenueCanada allows us to depreciate the machine at 20% per yearand our tax rate is 50%.

What is our after-tax IRR?

APEGBC December 2006, Question 3The Engineering Department of your company proposes a three-year project tomanufacture fuel gauges for the automotive industry. The yearly revenuesgenerated by the project and its costs (labour, materials and overhead) are estimated to be $1,400,000 and $710,000 respectively.

The project requires an initial capital investment of $1,800,000 for purchasing the production equipment. The purchase would be fully financed by a 3-year loan from the BNS Bank at 8% interest. The loan would be completely repaidtogether with interest in three equal end-of-year payments starting a year after the loan is received. The production equipment will be sold at the end of the threeyears for $450,0000. The company’s MARR is 12%, and the CCA rate for theequipment is 30%. The income-tax rate is 40%.

Determine: a) The CCA (including terminal loss if any) in the final year b) The interest portion of the loan payment in the second yearc) The income tax payable in the final yeard) The after-tax present worth of the project’s cash flows

APEGBC May 2007 Q. 2

The following equipment is available about an engineering project:

Equipment cost $6,000,000Annual Revenue $3,200,000Annual cost (excluding interest and depreciation) $1,400,000Project life 3 yearsFinal salvage value $1,000,000Bank loan $4,200,000Loan duration 3 yearsBank interest rate 8%MARR 10%Tax rate 30%CCA 20%

The loan is fully repaid in three year-end payments. Determine:a) The interest portion of the final loan paymentb) The CCA (including terminal loss) in the final yearc) The before-tax cash flow in the final yeard) The income tax payable in the final yeare) The after-tax cashflow in the final year

APEGBC May 2008 Question 2

Your company contemplates the acquisition of Imcon Ltd., a small companythat makes plastic bottles. The bottles are molded using three fully automatedinjection-molding machines. The following financial information is available about the latest fiscal year of Imcon ending on December 31, 2007:

Income $X Costs (excluding subcontracting and interest costs) $650,000Subcontracting $319,000Yearly loan payment (end of year) $450,822Interest portion of loan payment $64,315Capital cost allowance for the injection-molding machines $103,680

The CCA rate for the injection-molding machines is 40%. They were purchased in 2003. The income-tax rate is 30%, the MARR is 12%, and the loan interest rate is 8%. Determine:a) The before-tax cashflow if X=$2,100,000b) The after-tax cashflow if X =$2,100,000c) The cost of the injection-molding machines in 2003d) The loan balance immediately after the Dec 31, 2007 loan paymente) The minimum value of X that would make the after-tax cashflow positive

Note: we’resolving thisdiagram from the bottom upwards.