This chapter provides an overview of tax terminology, income tax rates, and
tax equations pertinent to an after-tax economic analysis. The transfer from
estimating cash flow before taxes (CFBT) to cash flow after taxes (CFAT)
involves a consideration of significant tax effects that may alter the final
decision, as well as estimate the magnitude of the tax effect on cash flow
over the life of the alternative.
Mutually exclusive alternative comparisons using after-tax PW, AW, and
ROR methods are explained with major tax implications considered. Replacement
studies are discussed with tax effects that occur at the time that a
defender is replaced. Also, the after-tax economic value added by an alternative
is discussed in the context of annual worth analysis. All these methods
use the procedures learned in earlier chapters, except now with tax effects
considered.
An after-tax evaluation using any method requires more computations
than those in previous chapters. The computer greatly reduces the analysis
time due to the power of spreadsheet formatting and functions. Templates
for tabulation of cash flow after taxes by hand and by computer are developed.
Additional information on U.S. federal taxes—tax law, and annually
updated tax rates—is available through Internal Revenue Service publications
and, more readily, on the IRS website www.irs.gov. Publications 542,
Corporations, and 544, Sales and Other Dispositions of Assets, are especially
applicable to this chapter. Some differences in tax considerations outside
the United States are summarized in the last section.
The case study provides the opportunity to perform a complete after-tax
analysis of debt versus equity financing, with asset depreciation included. It
is an application of the generalized cash flow analysis model.
