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Setelah-Pajak
Principles of Engineering Economic Analysis, 5th edition
Pesan Utama #1
Lakukan analisa setelahpajak/after-tax, jangan
analisa sebelumpajak/beore-tax, kecuali
dalam situasi tidak umum.
Principles of Engineering Economic Analysis, 5th edition
Contoh 10.1
A small business is forecasting a taxable income
of $50,000 for the year. The owner is considering
making an investment that will increase taxable
income by $45,000. If the investment is pursued
and the anticipated return occurs, what will be
the magnitude of the increase in income taxes
caused by the new investment? What would be
the magnitude of the increase in income taxes if
the company forecasts a taxable income of
$400,000 for the year?
Effective Company
Tax Rate
Effective
Tax Rate
ABB
27.0%
Federal Express
37.3%
Abbott Laboratories
19.3% Harley-Davidson
35.5%
BP
37.0%
Hewlett-Packard
20.8%
Canon
33.2%
Home Depot
36.4%
Caterpillar
30.0%
Intel
23.9%
Coca-Cola
24.0%
34.4%
ConocoPhillips
48.9%
Motorola
26.0%
Eli Lilly
23.8%
Wal-Mart
33.6%
Contoh 10.2
For Example 10.1, the effective tax
rate, when base taxable income is
$50,000 and an additional $45,000 in
taxable income will occur, is
$20,550/($50,000 + $45,000), or 21.63%.
The incremental tax rate is
($20,550 - $7500)/$45,000, or 29%.
The marginal tax rate is 34%.
Principles of Engineering Economic Analysis, 5th edition
In performing engineering
economic analyses, use
the marginal tax rate.
Let
BTCF
DWO
TI
str
ftr
itr
T
ATCF
=
=
=
=
=
=
=
=
Analisa After-Tax
Alternatip Single
Contoh 10.3
A $500,000 investment in a surface mount
placement machine produces after-tax net
revenue of $92,500/yr for 10 years, at which
time the SMP machine has a salvage value
of $50,000. Based on a 40% income tax
rate, a 10% ATMARR, & SLN depreciation,
what will be the ATPW, ATFW, ATAW,
ATIRR, and ATERR for the SMP
investment? What will be the BTCF, BTPW,
BTFW, BTAW, BTIRR, and BTERR if the
BTMARR is 0.10/(1.0 0.4) = 16.667%?
Principles of Engineering Economic Analysis, 5th edition
$31,666.67
$31,666.67
$31,666.67
$31,666.67
$31,666.67
$31,666.67
$31,666.67
$31,666.67
$31,666.67
$31,666.67
MARRAT =
ATCF
-$500,000.00
$92,500.00
$92,500.00
$92,500.00
$92,500.00
$92,500.00
$92,500.00
$92,500.00
$92,500.00
$92,500.00
$142,500.00
10%
PW AT =
$87,649.62
FW BT = $449,547.99
FW AT =
$227,340.55
AW BT =
AW AT =
$14,264.57
PW BT =
BTCF
-$500,000.00
$124,166.67
$124,166.67
$124,166.67
$124,166.67
$124,166.67
$124,166.67
$124,166.67
$124,166.67
$124,166.67
$174,166.67
16.667%
DWO
$45,000.00
$45,000.00
$45,000.00
$45,000.00
$45,000.00
$45,000.00
$45,000.00
$45,000.00
$45,000.00
$45,000.00
TI
$79,166.67
$79,166.67
$79,166.67
$79,166.67
$79,166.67
$79,166.67
$79,166.67
$79,166.67
$79,166.67
$79,166.67
$96,229.49
$20,406.41
IRR BT =
21.64%
IRR AT =
13.80%
ERR BT =
18.74%
ERR AT =
11.79%
Example 10.4
A $500,000 investment in a surface mount
placement machine produces before-tax
net revenue of $124,166.67/yr for 10 years,
at which time the SMP machine has a
salvage value of $50,000. Based on a 40%
income tax rate, a 10% ATMARR, & 5-yr
MACRS depreciation, what will be the
ATPW, ATFW, ATAW, ATIRR, and ATERR
for the SMP investment?
BTCF
DWO
TI
T
ATCF
-$500,000.00
-$500,000.00
$124,166.67 $100,000.00 $24,166.67
$9,666.67 $114,500.00
$124,166.67 $160,000.00 -$35,833.33 -$14,333.33 $138,500.00
$124,166.67 $96,000.00 $28,166.67 $11,266.67 $112,900.00
$124,166.67 $57,600.00 $66,566.67 $26,626.67
$97,540.00
$124,166.67 $57,600.00 $66,566.67 $26,626.67
$97,540.00
$124,166.67 $28,800.00 $95,366.67 $38,146.67
$86,020.00
$124,166.67
$0.00 $124,166.67 $49,666.67
$74,500.00
$124,166.67
$0.00 $124,166.67 $49,666.67
$74,500.00
$124,166.67
$0.00 $124,166.67 $49,666.67
$74,500.00
$174,166.67
$0.00 $174,166.67 $69,666.67 $104,500.00
PW AT = $123,988.64
FW AT =
$321,594.61
AW AT =
$20,178.58
IRR AT =
16.12%
ERR AT =
12.46%
SMP Investment
Measure of Economic Worth
With SLN
With MACRS
PWAT
$87,649.62
$123,988.64
FWAT
$227,340.55 $321,594.61
AWAT
$14,264.57
$20,178.58
IRRAT
13.80%
16.12%
ERRAT
11.79%
12.46%
Main Message #2
In general, the faster
an investment is
depreciated, the
greater its after-tax
present worth.
Principles of Engineering Economic Analysis, 5th edition
Example 10.5
A $500,000 investment in a surface mount
placement machine produces BTCF of
$124,166.67/yr for 10 years, at which time the
SMP machine is sold for $50,000. If DDB
depreciation is used, based on a 40% income tax
rate, a 10% ATMARR, & 5-yr MACRS
depreciation, what will be the ATPW, ATFW,
ATAW, ATIRR, and ATERR for the SMP
investment?
BTCF
-$500,000.00
$124,166.67
$124,166.67
$124,166.67
$124,166.67
$124,166.67
$124,166.67
$124,166.67
$124,166.67
$124,166.67
$174,166.67
B 10 =
DWO
TI
ATCF
-$500,000.00
$114,500.00
$106,500.00
$100,100.00
$94,980.00
$90,884.00
$87,607.20
$84,985.76
$82,888.61
$81,210.89
$131,343.55
PW AT =
$105,429.72
FW AT =
$273,457.54
AW AT =
$17,158.20
IRR AT =
14.88%
ERR AT =
12.12%
Example 10.6
A $500,000 investment is made in a consulting
study that produces BTCF of $124,166.67/yr for
10 years, plus an additional $50,000 in the 10th
year. Based on a 40% income tax rate and a 10%
ATMARR, what will be the ATPW, ATFW, ATAW,
ATIRR, and ATERR for the investment in the
consultant?
BTCF
-$500,000.00
$124,166.67
$124,166.67
$124,166.67
$124,166.67
$124,166.67
$124,166.67
$124,166.67
$124,166.67
$124,166.67
$174,166.67
TI
T
ATCF
-$500,000.00 -$200,000.00 -$300,000.00
$124,166.67 $49,666.67 $74,500.00
$124,166.67 $49,666.67 $74,500.00
$124,166.67 $49,666.67 $74,500.00
$124,166.67 $49,666.67 $74,500.00
$124,166.67 $49,666.67 $74,500.00
$124,166.67 $49,666.67 $74,500.00
$124,166.67 $49,666.67 $74,500.00
$124,166.67 $49,666.67 $74,500.00
$124,166.67 $49,666.67 $74,500.00
$174,166.67 $69,666.67 $104,500.00
PW AT = $169,336.56
FW AT =
$439,215.43
AW AT =
$27,558.75
IRR AT =
21.64%
ERR AT =
15.03%
Expensing vs Capitalizing
Measure of Economic Worth
Expensing
Capitalizing
PWAT
$169,336.56 $123,988.64
FWAT
$439,215.43 $321,594.61
AWAT
$27,558.75
$20,178.58
IRRAT
21.64%
16.12%
ERRAT
15.03%
12.46%
After-Tax Analysis
Multiple Alternatives
Example 10.7
Recall the two design alternatives for the Scream
Machine considered previously. Now, we perform
an after-tax analysis, based on: design A having
an initial investment of $300,000 and producing
before-tax net annual revenue of $71,666.67; and
design B having an initial investment of $450,000
and producing before-tax net annual revenue of
$103,333.33. Based on a 40% income tax rate, a
10% ATMARR, and 7-yr MACRS depreciation,
perform an after-tax comparison of the two
alternatives.
BTCF(A)
-$300,000.00
$71,666.67
$71,666.67
$71,666.67
$71,666.67
$71,666.67
$71,666.67
$71,666.67
$71,666.67
$71,666.67
$71,666.67
DWO(A)
EOY
0
1
2
3
4
5
6
7
8
9
10
BTCF(B)
-$450,000.00
$103,333.33
$103,333.33
$103,333.33
$103,333.33
$103,333.33
$103,333.33
$103,333.33
$103,333.33
$103,333.33
$103,333.33
DWO(B)
$42,870.00
$73,470.00
$52,470.00
$37,470.00
$26,790.00
$26,760.00
$26,790.00
$13,380.00
$0.00
$0.00
$64,305.00
$110,205.00
$78,705.00
$56,205.00
$40,185.00
$40,140.00
$40,185.00
$20,070.00
$0.00
$0.00
TI(A)
$28,796.67
-$1,803.33
$19,196.67
$34,196.67
$44,876.67
$44,906.67
$44,876.67
$58,286.67
$71,666.67
$71,666.67
TI(B)
$39,028.33
-$6,871.67
$24,628.33
$47,128.33
$63,148.33
$63,193.33
$63,148.33
$83,263.33
$103,333.33
$103,333.33
T(A)
$11,518.67
-$721.33
$7,678.67
$13,678.67
$17,950.67
$17,962.67
$17,950.67
$23,314.67
$28,666.67
$28,666.67
PW(A) =
T(B)
$15,611.33
-$2,748.67
$9,851.33
$18,851.33
$25,259.33
$25,277.33
$25,259.33
$33,305.33
$41,333.33
$41,333.33
PW(B) =
ATCF(A)
-$300,000.00
$60,148.00
$72,388.00
$63,988.00
$57,988.00
$53,716.00
$53,704.00
$53,716.00
$48,352.00
$43,000.00
$43,000.00
$50,790.36
ATCF(B)
-$450,000.00
$87,722.00
$106,082.00
$93,482.00
$84,482.00
$78,074.00
$78,056.00
$78,074.00
$70,028.00
$62,000.00
$62,000.00
$60,824.10
Example 10.8
In the previous example, suppose alternative A
qualifies as 3-yr property and alternative B
qualifies as 7-yr property. Based on a 40%
income tax rate and a 10% ATMARR, perform an
after-tax comparison of the two alternatives.
BTCF(A)
DWO(A)
TI(A)
T(A)
ATCF(A)
-$300,000.00
-$300,000.00
$71,666.67
$99,990.00 -$28,323.33 -$11,329.33
$82,996.00
$71,666.67 $133,350.00 -$61,683.33 -$24,673.33
$96,340.00
$71,666.67
$44,430.00 $27,236.67 $10,894.67
$60,772.00
$71,666.67
$22,230.00 $49,436.67 $19,774.67
$51,892.00
$71,666.67
$0.00 $71,666.67 $28,666.67
$43,000.00
$71,666.67
$0.00 $71,666.67 $28,666.67
$43,000.00
$71,666.67
$0.00 $71,666.67 $28,666.67
$43,000.00
$71,666.67
$0.00 $71,666.67 $28,666.67
$43,000.00
$71,666.67
$0.00 $71,666.67 $28,666.67
$43,000.00
$71,666.67
$0.00 $71,666.67 $28,666.67
$43,000.00
PW(A) = $64,084.76
BTCF(B)
DWO(B)
TI(B)
T(B)
ATCF(B)
-$450,000.00
-$450,000.00
$103,333.33
$64,305.00 $39,028.33 $15,611.33
$87,722.00
$103,333.33 $110,205.00 -$6,871.67 -$2,748.67 $106,082.00
$103,333.33
$78,705.00 $24,628.33
$9,851.33
$93,482.00
$103,333.33
$56,205.00 $47,128.33 $18,851.33
$84,482.00
$103,333.33
$40,185.00 $63,148.33 $25,259.33
$78,074.00
$103,333.33
$40,140.00 $63,193.33 $25,277.33
$78,056.00
$103,333.33
$40,185.00 $63,148.33 $25,259.33
$78,074.00
$103,333.33
$20,070.00 $83,263.33 $33,305.33
$70,028.00
$103,333.33
$0.00 $103,333.33 $41,333.33
$62,000.00
$103,333.33
$0.00 $103,333.33 $41,333.33
$62,000.00
PW(B) = $60,824.10
Example 10.9
A distribution center is considering using a robot
to perform palletizing. The robot has an initial
cost of $125,000; its annual O&M cost is $500; it
qualifies as 3-yr property; and it has a $25,000
salvage value after 5 yrs. Alternatively, 2 people
can perform the palletizing at an annual cost of
$50,000. Using a 5-yr planning horizon, a 40% tax
rate, a 10% ATMARR, and an AW analysis, should
the robot be purchased?
BTCF
-$125,000.00
-$500.00
-$500.00
-$500.00
-$500.00
$24,500.00
DWO
$41,662.50
$55,562.50
$18,512.50
$9,262.50
$0.00
TI
-$42,162.50 -$16,865.00
-$56,062.50 -$22,425.00
-$19,012.50 -$7,605.00
-$9,762.50 -$3,905.00
$24,500.00
$9,800.00
AW =
ATCF
-$125,000.00
$16,365.00
$21,925.00
$7,105.00
$3,405.00
$14,700.00
-$19,840.63
Example 10.10
Acme Brick is considering adding 5 lift trucks to its fleet. It
can either purchase or lease the trucks. If purchased, each
truck has a first cost of $18,000; annual O&M costs of
$3750; and a salvage value of $3000. Lift trucks qualify as
3-yr property.
If the lift trucks are leased, beginning-of-year payments of
$5900/truck, plus operating costs of $1800/truck, will be
incurred.
Using a 5-yr planning horizon, a 40% tax rate, a 10%
ATMARR, and an AW analysis, should the trucks be
purchased or leased?
Principles of Engineering Economic Analysis, 5th edition
DWO(P)
TI(P)
$29,997.00
$40,005.00
$13,329.00
$6,669.00
$0.00
-$48,747.00
-$58,755.00
-$32,079.00
-$25,419.00
-$3,750.00
DWO(L)
TI(L)
-$29,500.00
-$38,500.00
-$38,500.00
-$38,500.00
-$38,500.00
-$9,000.00
$0.00
$0.00
$0.00
$0.00
$0.00
T(P)
-$19,498.80
-$23,502.00
-$12,831.60
-$10,167.60
-$1,500.00
PW(P) =
T(L)
-$11,800.00
-$15,400.00
-$15,400.00
-$15,400.00
-$15,400.00
-$3,600.00
PW(L) =
ATCF(P)
-$90,000.00
$748.80
$4,752.00
-$5,918.40
-$8,582.40
-$2,250.00
-$96,486.74
ATCF(L)
-$17,700.00
-$23,100.00
-$23,100.00
-$23,100.00
-$23,100.00
-$5,400.00
-$90,926.87
After-Tax Analysis
Borrowing Investment Capital
Example 10.11
Now, we apply the four loan repayment methods to
the SMP investment. We assume $300,000 is
borrowed at 12% annual compound interest and
repaid in 10 yrs.
We will use a 10-yr planning horizon, a 40% tax
rate, a 10% ATMARR, and a PW analysis to
determine the preferred borrowing method.
After-Tax Analysis of SMP Investment with $300,000 Borrowed & Repaid Using Method 2
EOY
0
1
2
3
4
5
6
7
8
9
10
40%
IPMT
DWO
TI
Tax
-$4,733.33
-$27,293.33
-$253.33
$16,546.67
$17,986.67
$30,946.67
$43,906.67
$45,346.67
$46,786.67
$68,226.67
PW AT =
ATCF
-$200,000.00
$62,900.00
$89,060.00
$65,620.00
$52,420.00
$54,580.00
$45,220.00
$35,860.00
$38,020.00
$40,180.00
$72,340.00
$156,374.28
FW AT = $405,594.61
AW AT =
$25,449.19
IRR AT =
28.51%
ERR AT =
16.54%
After-Tax Analysis of SMP Investment with $300,000 Borrowed & Repaid Using Method 3
MARR =
income tax rate =
EOY
BT&LCF
PPMT
0
-$500,000.00 -$300,000.00
1
$124,166.67 $17,095.25
2
$124,166.67 $19,146.68
3
$124,166.67 $21,444.28
4
$124,166.67 $24,017.59
5
$124,166.67 $26,899.71
6
$124,166.67 $30,127.67
7
$124,166.67 $33,742.99
8
$124,166.67 $37,792.15
9
$124,166.67 $42,327.21
10
$174,166.67 $47,406.47
10%
40%
IPMT
TI
Tax
-$4,733.33
-$27,912.76
-$1,393.72
$14,995.61
$16,148.45
$28,959.64
$41,925.76
$43,545.43
$45,359.45
$67,391.16
PW AT =
ATCF
-$200,000.00
$75,804.75
$98,984.18
$72,465.14
$56,075.81
$54,922.97
$42,111.78
$29,145.66
$27,525.99
$25,711.97
$53,680.26
$160,734.89
FW AT =
$416,904.92
AW AT =
$26,158.86
IRR AT =
31.65%
ERR AT =
16.68%
ATPW maximized @
9.328% MARR
Method 1 is preferred
(Given the results, it is anticipated that
ATPW will increase with increased
borrowing. Lets see what happens if we
borrow 100% of the capital needed to
acquire the SMP machine and repay
using Method 1.)
Principles of Engineering Economic Analysis, 5th edition
SMP Investment
Measure
of Worth
PWAT
FWAT
AWAT
0% Debt*
Capitalizing
$123,988.64
$321,594.61
$20,178.58
60% Debt*
Capitalizing
$175,603.01
$455,468.98
$28,578.58
100% Debt*
Capitalizing
$210,012.58
$544,718.55
$34,178.58
ATPW for a $500,000 Loan with an Interest Rate Equal to MARR/(1 itr).
MARR = 10%
income tax rate = 40%
BT&LCF
PPMT
IPMT
-$500,000.00 -$500,000.00
$124,166.67
$0.00
$83,333.33
$124,166.67
$0.00
$83,333.33
$124,166.67
$0.00
$83,333.33
$124,166.67
$0.00
$83,333.33
$124,166.67
$0.00
$83,333.33
$124,166.67
$0.00
$83,333.33
$124,166.67
$0.00
$83,333.33
$124,166.67
$0.00
$83,333.33
$124,166.67
$0.00
$83,333.33
$174,166.67 $500,000.00
$83,333.33
$100,000.00
$160,000.00
$96,000.00
$57,600.00
$57,600.00
$28,800.00
$0.00
$0.00
$0.00
$0.00
-$59,166.66
-$119,166.66
-$55,166.66
-$16,766.66
-$16,766.66
$12,033.34
$40,833.34
$40,833.34
$40,833.34
$90,833.34
-$23,666.67
-$47,666.67
-$22,066.67
-$6,706.67
-$6,706.67
$4,813.33
$16,333.33
$16,333.33
$16,333.33
$36,333.33
PW =
0
1
2
3
4
5
6
7
8
9
10
-$500,000.00 -$500,000.00
$124,166.67
$50,000.00
$124,166.67
$50,000.00
$124,166.67
$50,000.00
$124,166.67
$50,000.00
$124,166.67
$50,000.00
$124,166.67
$50,000.00
$124,166.67
$50,000.00
$124,166.67
$50,000.00
$124,166.67
$50,000.00
$174,166.67
$50,000.00
$83,333.33
$75,000.00
$66,666.67
$58,333.33
$50,000.00
$41,666.67
$33,333.33
$25,000.00
$16,666.67
$8,333.33
$100,000.00
$160,000.00
$96,000.00
$57,600.00
$57,600.00
$28,800.00
$0.00
$0.00
$0.00
$0.00
-$59,166.66
-$110,833.33
-$38,500.00
$8,233.34
$16,566.67
$53,700.00
$90,833.34
$99,166.67
$107,500.00
$165,833.34
-$23,666.67
-$44,333.33
-$15,400.00
$3,293.33
$6,626.67
$21,480.00
$36,333.33
$39,666.67
$43,000.00
$66,333.33
PW =
0
1
2
3
4
5
6
7
8
9
10
-$500,000.00 -$500,000.00
$124,166.67
$22,696.59
$124,166.67
$26,479.35
$124,166.67
$30,892.58
$124,166.67
$36,041.34
$124,166.67
$42,048.23
$124,166.67
$49,056.27
$124,166.67
$57,232.31
$124,166.67
$66,771.03
$124,166.67
$77,899.53
$174,166.67
$90,882.79
$83,333.33
$79,550.57
$75,137.34
$69,988.58
$63,981.69
$56,973.65
$48,797.61
$39,258.89
$28,130.39
$15,147.13
$100,000.00
$160,000.00
$96,000.00
$57,600.00
$57,600.00
$28,800.00
$0.00
$0.00
$0.00
$0.00
-$59,166.66
-$115,383.90
-$46,970.67
-$3,421.91
$2,584.98
$38,393.02
$75,369.06
$84,907.78
$96,036.28
$159,019.54
-$23,666.67
-$46,153.56
-$18,788.27
-$1,368.76
$1,033.99
$15,357.21
$30,147.62
$33,963.11
$38,414.51
$63,607.82
PW =
0
1
2
3
4
5
6
7
8
9
10
-$500,000.00 -$500,000.00
$124,166.67
$0.00
$124,166.67
$0.00
$124,166.67
$0.00
$124,166.67
$0.00
$124,166.67
$0.00
$124,166.67
$0.00
$124,166.67
$0.00
$124,166.67
$0.00
$124,166.67
$0.00
$174,166.67 $500,000.00
$0.00
$0.00
$0.00
$0.00
$0.00
$0.00
$0.00
$0.00
$0.00
$1,835,812.08
$100,000.00
$160,000.00
$96,000.00
$57,600.00
$57,600.00
$28,800.00
$0.00
$0.00
$0.00
$0.00
$24,166.67
-$35,833.33
$28,166.67
$66,566.67
$66,566.67
$95,366.67
$124,166.67
$124,166.67
$124,166.67
-$1,661,645.41
$9,666.67
-$14,333.33
$11,266.67
$26,626.67
$26,626.67
$38,146.67
$49,666.67
$49,666.67
$49,666.67
-$664,658.17
PW =
EOY
0
1
2
3
4
5
6
7
8
9
10
TI
Tax
ATCF
$0.00
$64,500.00
$88,500.00
$62,900.00
$47,540.00
$47,540.00
$36,020.00
$24,500.00
$24,500.00
$24,500.00
-$445,500.00
$123,988.64
$0.00
$14,500.00
$43,500.00
$22,900.00
$12,540.00
$17,540.00
$11,020.00
$4,500.00
$9,500.00
$14,500.00
$49,500.00
$123,988.64
$0.00
$41,803.42
$64,290.31
$36,925.02
$19,505.52
$17,102.76
$2,779.54
-$12,010.87
-$15,826.36
-$20,277.76
$4,528.94
$123,988.64
$0.00
$114,500.00
$138,500.00
$112,900.00
$97,540.00
$97,540.00
$86,020.00
$74,500.00
$74,500.00
$74,500.00
-$1,496,987.25
$6,545.98
Example 10.12
A small business borrows $100,000 at 15%
compounded annually and repays the loan over a
5-yr period. Its income tax rate is 40%. If the
business has a 10% ATMARR, using an ATPW
analysis, which repayment method is preferred?
How does the preference change for various
interest rates?
PPMT
-$100,000.00
$0.00
$0.00
$0.00
$0.00
$100,000.00
IPMT
TI
$15,000.00
$15,000.00
$15,000.00
$15,000.00
$15,000.00
-$15,000.00
-$15,000.00
-$15,000.00
-$15,000.00
-$15,000.00
-$6,000.00
-$6,000.00
-$6,000.00
-$6,000.00
-$6,000.00
ATPW =
ATCF
$100,000.00
-$9,000.00
-$9,000.00
-$9,000.00
-$9,000.00
-$109,000.00
$3,790.79
0
1
2
3
4
5
-$100,000.00
$20,000.00
$20,000.00
$20,000.00
$20,000.00
$20,000.00
$15,000.00
$12,000.00
$9,000.00
$6,000.00
$3,000.00
-$15,000.00
-$12,000.00
-$9,000.00
-$6,000.00
-$3,000.00
-$6,000.00
-$4,800.00
-$3,600.00
-$2,400.00
-$1,200.00
ATPW =
$100,000.00
-$29,000.00
-$27,200.00
-$25,400.00
-$23,600.00
-$21,800.00
$2,418.43
0
1
2
3
4
5
$100,000.00
$14,831.56
$17,056.29
$19,614.73
$22,556.94
$25,940.48
$15,000.00
$12,775.27
$10,216.82
$7,274.61
$3,891.07
-$15,000.00
-$12,775.27
-$10,216.82
-$7,274.61
-$3,891.07
-$6,000.00
-$5,110.11
-$4,086.73
-$2,909.85
-$1,556.43
ATPW =
$100,000.00
-$23,831.56
-$24,721.45
-$25,744.83
-$26,921.71
-$28,275.13
$2,617.01
0
1
2
3
4
5
$100,000.00
$100,000.00
$0.00
$0.00
$0.00
$0.00
$0.00
$0.00
$0.00
$0.00
$0.00
$0.00
$0.00
$0.00
$0.00
$0.00
$0.00
$0.00
$0.00
$0.00
$0.00
$0.00
$100,000.00 $101,135.72 -$101,135.72 -$40,454.29 -$160,681.43
ATPW =
$229.47
$40,000
$30,000
ATMARR
= 10%
$20,000
$10,000
$0
0%
1%
2%
3%
4%
5%
6%
7%
8%
9%
10% 11% 12% 13% 14% 15% 16% 17% 18% 19% 20%
Method 4 is best
-$10,000
Method 1 is best
Method 2 is best
if borrowing is
required
-$20,000
Method 1
Method 2
Method 3
Method 4
ATPW for the $100,000 Loan for Each of Four Repayment Methods
Principles of Engineering Economic Analysis, 5th edition
Example 10.13
Recall Example 3.8, which involved choosing a mortgage for
a house purchase. Three alternative mortgages were
considered: 30-yr conventional; 30-yr ARM; and a 30-yr
balloon (interest only) loan. The ARM was eliminated due to
risk considerations.
If the professional couple is in a 33% income tax bracket
and their ATMARR is 6.5% per annum compounded monthly,
which mortgage is preferred?
ATPWballoon =PV(0.065/12,60,0.67*1848.48)
+PV(0.065/12,60,,350000*1.01753+7500)
= -$326,264.30
Principles of Engineering Economic Analysis, 5th edition
Month
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
29
30
BTLCF
-$2,338.87
-$2,338.87
-$2,338.87
-$2,338.87
-$2,338.87
-$2,338.87
-$2,338.87
-$2,338.87
-$2,338.87
-$2,338.87
-$2,338.87
-$2,338.87
-$2,338.87
-$2,338.87
-$2,338.87
-$2,338.87
-$2,338.87
-$2,338.87
-$2,338.87
-$2,338.87
-$2,338.87
-$2,338.87
-$2,338.87
-$2,338.87
-$2,338.87
-$2,338.87
-$2,338.87
-$2,338.87
-$2,338.87
-$2,338.87
IPMT
$2,039.04
$2,037.37
$2,035.69
$2,034.00
$2,032.29
$2,030.58
$2,028.86
$2,027.13
$2,025.39
$2,023.64
$2,021.88
$2,020.11
$2,018.33
$2,016.53
$2,014.73
$2,012.92
$2,011.09
$2,009.26
$2,007.41
$2,005.56
$2,003.69
$2,001.81
$1,999.93
$1,998.03
$1,996.12
$1,994.19
$1,992.26
$1,990.32
$1,988.36
$1,986.39
TI
-$2,039.04
-$2,037.37
-$2,035.69
-$2,034.00
-$2,032.29
-$2,030.58
-$2,028.86
-$2,027.13
-$2,025.39
-$2,023.64
-$2,021.88
-$2,020.11
-$2,018.33
-$2,016.53
-$2,014.73
-$2,012.92
-$2,011.09
-$2,009.26
-$2,007.41
-$2,005.56
-$2,003.69
-$2,001.81
-$1,999.93
-$1,998.03
-$1,996.12
-$1,994.19
-$1,992.26
-$1,990.32
-$1,988.36
-$1,986.39
T
-$672.88
-$672.33
-$671.78
-$671.22
-$670.66
-$670.09
-$669.52
-$668.95
-$668.38
-$667.80
-$667.22
-$666.64
-$666.05
-$665.46
-$664.86
-$664.26
-$663.66
-$663.06
-$662.45
-$661.83
-$661.22
-$660.60
-$659.98
-$659.35
-$658.72
-$658.08
-$657.45
-$656.80
-$656.16
-$655.51
ATLCF
Month
BTLCF
-$1,665.98
31
-$2,338.87
-$1,666.54
32
-$2,338.87
-$1,667.09
33
-$2,338.87
-$1,667.65
34
-$2,338.87
-$1,668.21
35
-$2,338.87
-$1,668.77
36
-$2,338.87
-$1,669.34
37
-$2,338.87
-$1,669.91
38
-$2,338.87
-$1,670.49
39
-$2,338.87
-$1,671.07
40
-$2,338.87
-$1,671.65
41
-$2,338.87
-$1,672.23
42
-$2,338.87
-$1,672.82
43
-$2,338.87
-$1,673.41
44
-$2,338.87
-$1,674.01
45
-$2,338.87
-$1,674.60
46
-$2,338.87
-$1,675.21
47
-$2,338.87
-$1,675.81
48
-$2,338.87
-$1,676.42
49
-$2,338.87
-$1,677.03
50
-$2,338.87
-$1,677.65
51
-$2,338.87
-$1,678.27
52
-$2,338.87
-$1,678.89
53
-$2,338.87
-$1,679.52
54
-$2,338.87
-$1,680.15
55
-$2,338.87
-$1,680.78
56
-$2,338.87
-$1,681.42
57
-$2,338.87
-$1,682.06
58
-$2,338.87
-$1,682.71
59
-$2,338.87
-$1,683.36
60
-$333,258.00
BTPW = -$314,972.87
IPMT
$1,984.42
$1,982.43
$1,980.42
$1,978.41
$1,976.39
$1,974.35
$1,972.30
$1,970.24
$1,968.17
$1,966.08
$1,963.99
$1,961.88
$1,959.75
$1,957.62
$1,955.47
$1,953.32
$1,951.14
$1,948.96
$1,946.76
$1,944.55
$1,942.33
$1,940.10
$1,937.85
$1,935.59
$1,933.31
$1,931.02
$1,928.72
$1,926.41
$1,924.08
$1,921.74
TI
-$1,984.42
-$1,982.43
-$1,980.42
-$1,978.41
-$1,976.39
-$1,974.35
-$1,972.30
-$1,970.24
-$1,968.17
-$1,966.08
-$1,963.99
-$1,961.88
-$1,959.75
-$1,957.62
-$1,955.47
-$1,953.32
-$1,951.14
-$1,948.96
-$1,946.76
-$1,944.55
-$1,942.33
-$1,940.10
-$1,937.85
-$1,935.59
-$1,933.31
-$1,931.02
-$1,928.72
-$1,926.41
-$1,924.08
-$1,921.74
T
ATLCF
-$654.86
-$1,684.01
-$654.20
-$1,684.67
-$653.54
-$1,685.33
-$652.88
-$1,685.99
-$652.21
-$1,686.66
-$651.54
-$1,687.33
-$650.86
-$1,688.01
-$650.18
-$1,688.69
-$649.50
-$1,689.37
-$648.81
-$1,690.06
-$648.12
-$1,690.75
-$647.42
-$1,691.45
-$646.72
-$1,692.15
-$646.01
-$1,692.85
-$645.31
-$1,693.56
-$644.59
-$1,694.27
-$643.88
-$1,694.99
-$643.16
-$1,695.71
-$642.43
-$1,696.44
-$641.70
-$1,697.17
-$640.97
-$1,697.90
-$640.23
-$1,698.64
-$639.49
-$1,699.38
-$638.74
-$1,700.12
-$637.99
-$1,700.88
-$637.24
-$1,701.63
-$636.48
-$1,702.39
-$635.71
-$1,703.15
-$634.95
-$1,703.92
-$634.17 -$332,623.83
ATPW = -$325,333.87
Example
A company invests $100,000 and receives
$268,418.33 after 5 years. The ATMARR for the
business is 10%. The firm pays income taxes at a
marginal rate of 40%. If investment capital is
borrowed, an annual compound interest rate of 12%
must be paid.
Determine which repayment method is best if
a) $20,000 is borrowed?
b) $40,000 is borrowed?
c) $60,000 is borrowed?
d) $80,000 is borrowed?
e) $100,000 is borrowed?
Method
1
Method
2
Method
3
Method
4
EOY
0
1
2
3
4
5
ATMARR = 10%
income tax rate = 40%
BT&LCF
PPMT
IPMT
-$100,000.00
-$40,000.00
$0.00
$0.00
$4,800.00
$0.00
$0.00
$4,800.00
$0.00
$0.00
$4,800.00
$0.00
$0.00
$4,800.00
$268,418.33
$40,000.00
$4,800.00
EOY
0
1
2
3
4
5
IPMT
-$100,000.00
$0.00
$0.00
$0.00
$0.00
$268,418.33
PPMT
-$40,000.00
$8,000.00
$8,000.00
$8,000.00
$8,000.00
$8,000.00
EOY
0
1
2
3
4
5
IPMT
-$100,000.00
$0.00
$0.00
$0.00
$0.00
$268,418.33
PPMT
-$40,000.00
$6,296.39
$7,051.96
$7,898.19
$8,845.97
$9,907.49
EOY
0
1
2
3
4
10
PPMT
-$40,000.00
$0.00
$0.00
$0.00
$0.00
$40,000.00
IPMT
-$100,000.00
$0.00
$0.00
$0.00
$0.00
$268,418.33
$4,800.00
$3,840.00
$2,880.00
$1,920.00
$960.00
$4,800.00
$4,044.43
$3,198.20
$2,250.42
$1,188.90
$0.00
$0.00
$0.00
$0.00
$30,493.67
TI
-$4,800.00
-$4,800.00
-$4,800.00
-$4,800.00
$263,618.33
TI
-$4,800.00
-$3,840.00
-$2,880.00
-$1,920.00
$267,458.33
TI
-$4,800.00
-$4,044.43
-$3,198.20
-$2,250.42
$267,229.43
TI
$0.00
$0.00
$0.00
$0.00
$237,924.67
M4 ATPW = $0 with
15.07% interest rate
Principles of Engineering Economic Analysis, 5th edition
M4 ATPW = $0 with
15.07% interest rate
Main Message #3
It is profitable to borrow
investment capital as
long as the interest rate
is less than the ATMARR
divided by one minus the
income tax rate.
Principles of Engineering Economic Analysis, 5th edition
Example 10.14
For the SMP machine, suppose a 10% investment
tax credit is available. The cost basis is reduced
by 5%; hence, the cost basis is $475,000. What are
the measures of economic worth, given the 10%
investment tax credit and using a 10% ATMARR?
BTCF
DWO
TI
T
ITC
ATCF
-$500,000.00
-$500,000.00
$124,166.67 $95,000.00 $29,166.67 $11,666.67 $50,000.00 $162,500.00
$124,166.67 $152,000.00 -$27,833.33 -$11,133.33
$0.00 $135,300.00
$124,166.67 $91,200.00 $32,966.67 $13,186.67
$0.00 $110,980.00
$124,166.67 $54,720.00 $69,446.67 $27,778.67
$0.00
$96,388.00
$124,166.67 $54,720.00 $69,446.67 $27,778.67
$0.00
$96,388.00
$124,166.67 $27,360.00 $96,806.67 $38,722.67
$0.00
$85,444.00
$124,166.67
$0.00 $124,166.67 $49,666.67
$0.00
$74,500.00
$124,166.67
$0.00 $124,166.67 $49,666.67
$0.00
$74,500.00
$124,166.67
$0.00 $124,166.67 $49,666.67
$0.00
$74,500.00
$174,166.67
$0.00 $174,166.67 $69,666.67
$0.00 $104,500.00
PW = $161,710.59
FW = $419,435.61
AW = $26,317.65
=0.95*500000*0.32
IRR =
18.39%
ERR =
13.13%
Example 10.15
Assume two $500,000 SMP machines are the only
assets purchased and placed in service during the
tax year. Since the $1,000,000 investment exceeds
the $800,000 cap, the cost basis is reduced by
$1,050,000 - $1,000,000, or $50,000. What are the
measures of economic worth, given the Section
179 expense deduction?
Section 179
Deduction
$50,000.00
$0.00
$0.00
$0.00
$0.00
$0.00
$0.00
$0.00
$0.00
$0.00
DWO
TI
$190,000.00
$304,000.00
$182,400.00
$109,440.00
$109,440.00
$54,720.00
$0.00
$0.00
$0.00
$0.00
$8,333.34
$3,333.34
-$55,666.66 -$22,266.66
$65,933.34 $26,373.34
$138,893.34 $55,557.34
$138,893.34 $55,557.34
$193,613.34 $77,445.34
$248,333.34 $99,333.34
$248,333.34 $99,333.34
$248,333.34 $99,333.34
$298,333.34 $119,333.34
PW =
FW =
AW =
=(1000000-50000)*0.32
IRR =
ERR =
ATCF
-$1,000,000.00
$245,000.00
$270,600.00
$221,960.00
$192,776.00
$192,776.00
$170,888.00
$149,000.00
$149,000.00
$149,000.00
$179,000.00
$239,127.60
$620,235.41
$38,916.92
16.02%
12.38%
Reminder!
When using MACRS-GDS for property
years that include a half-year*
depreciation the first year and a halfyear depreciation the last year, we
assume a half-year depreciation charge
occurs regardless of when, during the
year, the acquisition or disposal of the
asset occurs
* The same principle applies when using property classes with a midmonth convention
Principles of Engineering Economic Analysis, 5th edition
Example 10.16
Recall the two design alternatives for The Scream
Machine considered previously. Now, we perform
an after-tax analysis, based on: design A having
an initial investment of $300,000 and producing
before-tax net annual revenue of $71,666.67; and
design B having an initial investment of $450,000
and producing before-tax net annual revenue of
$103,333.33. Based on a 40% income tax rate, a
10% ATMARR, and 7-yr MACRS depreciation,
perform an after-tax comparison of the two
alternatives when the first year DWO occurs at the
end of zero.
Principles of Engineering Economic Analysis, 5th edition
EOY
0
1
2
3
4
5
6
7
8
9
10
BTCF(A)
-$300,000.00
$71,666.67
$71,666.67
$71,666.67
$71,666.67
$71,666.67
$71,666.67
$71,666.67
$71,666.67
$71,666.67
$71,666.67
DWO(A)
$42,870.00
$73,470.00
$52,470.00
$37,470.00
$26,790.00
$26,760.00
$26,790.00
$13,380.00
$0.00
$0.00
$0.00
TI(A)
-$42,870.00
-$1,803.33
$19,196.67
$34,196.67
$44,876.67
$44,906.67
$44,876.67
$58,286.67
$71,666.67
$71,666.67
$71,666.67
EOY
0
1
2
3
4
5
6
7
8
9
10
BTCF(B)
-$450,000.00
$103,333.33
$103,333.33
$103,333.33
$103,333.33
$103,333.33
$103,333.33
$103,333.33
$103,333.33
$103,333.33
$103,333.33
DWO(B)
$64,305.00
$110,205.00
$78,705.00
$56,205.00
$40,185.00
$40,140.00
$40,185.00
$20,070.00
$0.00
$0.00
$0.00
TI(B)
-$64,305.00
-$6,871.67
$24,628.33
$47,128.33
$63,148.33
$63,193.33
$63,148.33
$83,263.33
$103,333.33
$103,333.33
$103,333.33
T(A)
ATCF(A)
-$17,148.00 -$282,852.00
-$721.33
$72,388.00
$7,678.67
$63,988.00
$13,678.67
$57,988.00
$17,950.67
$53,716.00
$17,962.67
$53,704.00
$17,950.67
$53,716.00
$23,314.67
$48,352.00
$28,666.67
$43,000.00
$28,666.67
$43,000.00
$28,666.67
$43,000.00
$59,447.76
PW(A) =
T(B)
ATCF(B)
-$25,722.00 -$424,278.00
-$2,748.67 $106,082.00
$9,851.33
$93,482.00
$18,851.33
$84,482.00
$25,259.33
$78,074.00
$25,277.33
$78,056.00
$25,259.33
$78,074.00
$33,305.33
$70,028.00
$41,333.33
$62,000.00
$41,333.33
$62,000.00
$41,333.33
$62,000.00
$73,810.19
PW(B) =
Recall, with 1st DWO @ EOY = 1, ATPW(A) = $37,951.10 and ATPW(B) = $41,565.37,
a $3614.18 incremental difference. Here, with 1st DWO @ EOY = 0, ATPW(A) =
$59,447.76 and ATPW(B) = $73,810.19, a $14,362.43 incremental difference.
Principles of Engineering Economic Analysis, 5th edition
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