Cost Estimating for Engineers

Taxes & Cash Flow

Taxable Income

+ Gross Income - Depreciation Allowance - Interest on Borrowed Money - Other Tax Exemptions = Taxable Income

Corporate Tax Rate

Taxable Income Tax Rate Income Tax 0 < TI < 50,000 0.15 .15(TI)50,000 < TI < 75,000 0.25 7,500 + .25(TI - 50,000)75,000 < TI < 100,000 0.34 13,750 + .34(TI - 75,000)100,000 < TI < 335,000 .39(.34+.05) 22.250 + .39(TI - 100,000)

335,000 < TI < 10,000,000 0.34 113,900 + .35(TI - 335,000)10,000,000 < TI < 15,000,000 0.35 3,400,000 + .35(TI - 10,000,000)15,000,000 < TI < 18,333,333 .38(.35+.03) 5,150,000 + .38(TI - 15,000,000)

TI > 18,333,333 0.35 .35(TI)

Corporate Tax

Ex: Suppose K-Corp earns $5,000,000 in revenue above manufacturing and operations cost. Suppose further that depreciation costs total $800,000 and interest paid on short and long term debt totals $1,500,000. Compute the tax paid.

After Tax Cash Flow

+ Gross Income - Interest

= Before Tax Cash Flow - Tax

= After Tax Cash Flow

After Tax Cash Flow

Ex: Suppose K-Corp earns $5,000,000 in revenue above manufacturing and operations cost. Suppose further that depreciation costs total $800,000 and interest paid on short and long term debt totals $1,500,000. Compute the after tax cash flow.

After Tax Cash Flow

Gross Income $ 5,000,000Depreciation - 800,000Interest - 1,500,000Before Tax Cash Flow $ 2,700,000

After Tax Cash Flow

Formulas BTCF = Before Tax Cash Flow

= Revenues - Expenses

TI = Taxable Income = Cash Flow - Interest - Depreciation

Tax = TI * Tax Rate

ATCF = After Tax Cash Flow= BTCF - Tax

Ex: After Tax Cash Flow

Tax Rate = 34%MARR = 20%

Taxablet BTCF MACRS % Depr. Income Tax ATCF

0 (82,000) (82,000)1 23,500 20.0% 16,400 7,100 2,414 21,0862 23,500 32.0% 26,240 (2,740) (932) 24,4323 23,500 19.2% 15,744 7,756 2,637 20,8634 23,500 11.5% 9,446 14,054 4,778 18,7225 23,500 11.5% 9,446 14,054 4,778 18,7226 23,500 5.8% 4,723 18,777 6,384 17,1167 28,500 0 28,500 9,690 18,810

NPV = $4,103 ($7,854)

Borrowed Money

Year Principle Interest Total Pmt. Loan Bal.Amt. Financed $210,000 0 $210,000Interest 16% 1 70000 33600 103600 $140,000Period of Loan 3 2 70000 22400 92400 $70,000Payment #NUM! 3 70000 11200 81200 $0Tax rate 34%MARR 20%

Project Loan Loan Before Tax MACRS MACRS Taxable Tax After Taxt Cash Flow Payment Interest Cash Flow % deduct Income 34% Cash Flow

0 (500,000) 210,000 (290,000) (290,000)1 150,000 70,000 33,600 46,400 20.0% 100,000 16,400 5,576 40,8242 150,000 70,000 22,400 57,600 32.0% 160,000 (32,400) (11,016) 68,6163 150,000 70,000 11,200 68,800 19.0% 95,000 43,800 14,892 53,9084 150,000 150,000 12.0% 60,000 90,000 30,600 119,4005 150,000 150,000 12.0% 60,000 90,000 30,600 119,4006 175,000 175,000 6.0% 30,000 145,000 49,300 125,700

NPW = ($29,471)

Class Problem

A company plans to invest in a water purification system (5 year property) requiring $800,000 capital. The system will last 7 years with a salvage of $100,000. The before-tax cash flow for each of years 1 to 6 is $200,000. Regular MACRS depreciation is used; the applicable tax rate is 34%. Construct a table showing each of the following for each of the 7 years.

Solution

Solution

Tax Rate = 34%MARR = 20%

Taxablet BTCF MACRS % Depr. Income Tax ATCF

0 (800,000) (800,000)1 200,0002 200,0003 200,0004 200,0005 200,0006 200,0007 300,000

NPV = ($51,173)