Qatar University

College of Engineering

Instructor: Dr. Mohamed Kharbeche

Chapter 17: After-Tax Economic Analysis
Problem 17.15:

𝐶𝐹𝐴𝑇 = 𝐺𝐼 – 𝑂𝐸 – 𝑃 + 𝑆 – (𝐺𝐼 – 𝑂𝐸 – 𝐷)𝑇𝑒

(𝑎) 𝑃 𝑎𝑛𝑑 𝑆 = 0
𝐷 = 200,000(0.0741) = $14,820
𝐶𝐹𝐴𝑇 = 100,000 – 50,000 – (100,000 – 50,000 – 14,820)(0.40)
= $35,928

(𝑏) 𝑆 = $20,000
𝐷 = 200,000(0.0741)
= $14,820
𝐶𝐹𝐴𝑇 = 100,000 – 50,000 + 20,000 − (100,000 – 50,000 – 14,820)(0.40)
= $55,928
Problem 17.18:
Estimate before-tax MARR by Equation [10.1]. Tabulate CFBT; calculate AW.
Before-tax MARR = 10 %/( 1- 0.35) = 15.4%. (All monetary values are in $1000 units.)
Year GI OE P and S CFBT
0 $-1900 $-1900
1 $800 $-100 700
2 950 -150 800
3 600 -200 400
4 300 -250 700 750

PW = −1900 + 700(P/F, 15.4%, 1) + … + 750(P/F, 15.4%, 4)

= −1900 + 700(0.867) + 800(0.751) + 400(0.651) + 750(0.564)
= $−9
AW = −9(A/P, 15.4%, 4) = −9(0.3531)
= $−3
= ($ − 3,000)
Equipment is not justified using CFBT values.
Problem 17.40:

Effective tax rate = 0.042 + (1 – 0.042) (0.34)

= 0.3677
Before − tax ROR = 0.07/(1 − 0.3677) = 0.111 (11.1%)
An 11.1 % before − tax rate is equivalent to 7% after taxes.
Problem 17.45:

𝑴𝒆𝒕𝒉𝒐𝒅 𝑨: 𝑌𝑒𝑎𝑟𝑠 1 − 5: 𝐶𝐹𝐵𝑇 = 35,000 – 15,000 = 20,000

D = (100,000 − 10,000)/5 = $18,000 Taxes = (20,000 – 18,000)(0.34) = $680
CFAT = 20,000 – 680 = $19,320
AWA = −100,000(A/P, 7%, 5) + 19,320 + 10,000(A/F, 7%, 5)
= $ − 3330
𝐌𝐞𝐭𝐡𝐨𝐝 𝐁: 𝐘𝐞𝐚𝐫𝐬 𝟏 − 𝟓: 𝐂𝐅𝐁𝐓 = 𝟒𝟓, 𝟎𝟎𝟎 – 𝟔, 𝟎𝟎𝟎 = 𝟑𝟗, 𝟎𝟎𝟎
150,000 − 20,000
D = = $26,000 Taxes = (39,000 – 26,000)(0.34) = $4420 CFAT
5
= 39,000 – 4420 = $34,580
AWA = −150,000(A/P, 7%, 5) + 34,580 + 20,000(A/F, 7%, 5)
= $ − 1474
Method B is selected; the same as that when MACRS is detailed.
Problem 17.47:

Alternative A
Year P&S GI - OE D TI Taxes CFAT
0 -8000 - - - - -8000
1 3500 2666 834 333 3167
2 3500 3556 -56 -22 3522
3 3500 1185 2315 926 2574
4 0 0 593 -593 -237 237

P P P
PWA = −8000 + 3167 ( , 8%, 1) + 3522 ( , 8%, 2) + 2574 ( , 8%, 3)
F F F
+ 237(P/F, 8%, 4)
= $169
Alternative B
Year P&S GI - OE
D TI Taxes CFAT
0 -13000 - - - - -13000
1 50004333 667 267 4733
2 50005779 -779 -311 5311
3 50001925 3075 1230 3770
4 0 0 963 -963 -385 385
2000 - - 2000 800 1200
P P P
PWB = −13,000 + 4733 ( , 8%, 1) + 5311 ( , 8%, 2) + 3770 ( , 8%, 3)
F F F
+ 385(P/F, 8%, 4) + 1200(P/F, 8%, 4)
= $93
Select alternative A
Additional Exercise:
Elias wants to perform an after-tax evaluation of equivalent methods A and B to
electrostatically remove airborne particulate matter from clean rooms used to package
liquid pharmaceutical products. Use classical SL depreciation with n=5 years to evaluate
the alternatives below where after-tax MARR is 10% per year, and Te =35%. Which
alternative should be selected?

Method A Method B
First Cost -100,000 -150,000
Salvage Value 10,000 20,000
Savings per year 35,000 45,000
AOC per year -15,000 -6,000
Expected life, years 5 5

For year 0, CFBT = CFAT = −100,000

For year 5, there is a salvage of 10,000
𝐌𝐞𝐭𝐡𝐨𝐝 𝐀: For Years 1 − 5: CFBT = 35,000 – 15,000 = 20,000
D = (100,000 − 10,000)/5 = 18,000
Taxes = (20,000 – 18,000)(0.35) = 700
CFAT = 20,000 – 700 = 19,300
AWA = −100,000(A/P, 10%, 5) + 19,300 + 10,000(A/F, 10%, 5)
= −100,000(0.26380) + 19,300 + 10,000(0.16380)
= −5,442
𝐌𝐞𝐭𝐡𝐨𝐝 𝐁: Years 1 − 5: CFBT = 45,000 – 6,000 = 39,000
D = (150,000 − 20,000)/5 = 26,000
Taxes = (39,000 – 26,000)(0.35) = 4550
CFAT = 39,000 – 4450 = 34,450
AWB = −150,000(A/P, 10%, 5) + 34,450 + 20,000(A/F, 10%, 5)
= −150,000(0.26380) + 34,450 + 20,000(0.16380)
= −1,844
Method B is selected.