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ENGR 3360U Winter 2014

Unit 12

After-Tax Cash Flow

Dr. J. Michael Bennett, P. Eng., PMP,

UOIT,

Version 2014-I-01

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Unit 12 After-Tax Cash Flow

Chane Re!or"

2014-#-01 #nitial Creation

Text referen!e Cha$ter 12

2014-#-0112-2 %r& '& (& )ennett *&En&+ *(* ENGR 3360

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Course Outline

, 0 (a!ro-(i!ro E!o, 2 En Estiation

, 3-4 #nterest an" E./ialen!e

, *resent Worth

, 6 Ann/al Cash Flow, Rate of Ret/rn

, Choosin the )est Alternatie

, 5ther Analses

, 10 Ris7 an" Un!ertaint

11 %e$re!iation 12 After-Tax Cash Flow

13 Re$la!eent Analsis

14 #nflation

1 (ARR 8ele!tion 16 */9li! 8e!tor #ss/es

1 A!!o/ntin

1 )/siness *lans

1 8/ar

2014-#-01 %r& '& (& )ennett *&En&+ *(* ENGR 336012-3

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Unit 12 Roa" (a$

12&1 %efinitions

12&2 Net Cash Flow

12&3 Cash Flow After-tax :CFAT;

12&4 Re$la!eent After-tax

12&

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2014-#-01 %r& '& (& )ennett *&En&+ *(* ENGR 336012-

12&1 #$ortant ters= Gross #n!oe

Gross #n!oe

Total in!oe for the tax ear fro all reen/e

$ro"/!in f/n!tion of the enter$rise& 8ales reen/es+

Fees+

Rent+

Roalties+ 8ale of assets

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2014-#-01 %r& '& (& )ennett *&En&+ *(* ENGR 336012-6

12&1 #n!oe Tax

The total ao/nt of one transferre"

fro the enter$rise to the ario/s taxin

aen!ies for a ien tax ear&

Cor$orate Taxes are norall $ai" onthl an"a final a">/stin $aent is s/9itte" with the

ann/al tax ret/rn&

This tax is 9ase" /$on the in!oe $ro"/!in $ower of the fir&

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2014-#-01 %r& '& (& )ennett *&En&+ *(* ENGR 336012-

12&1 5$eratin Ex$enses : E ;

All leall re!oni?e" !osts asso!iate" with

"oin 9/siness for the tax ear&

Real Cash Flows+

Tax-"e"/!ti9le ex$enses for !or$orations+ Waes an" salaries+

Utilities+

5ther taxes

(aterial ex$enses

A5C an" (@5 !osts are a$$li!a9le here

Gross #n!oe ex$enses B G# - E

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2014-#-01 %r& '& (& )ennett *&En&+ *(* ENGR 336012-

Ca$ital Cost Allowan!e :CCA;

*ortion of the /n"e$re!iate" !a$ital !ost :UCC;or 9oo7 al/e+ of a "e$re!iatin asset that !an 9e

!laie"& (ost hae the 0 r/le a$$lie" in the

first ear&CCAn+ UCCn+ * B initial !ost+ " B CCA !lass rate

For ear 1+ CCA1 B *:"D2;

For ear n+ CCAn B *:1-"D2;:1-";n-2 UCCn B *:1-"D2;:1-";n-1

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2014-#-01 %r& '& (& )ennett *&En&+ *(* ENGR 336012-

12&1 Taxa9le #n!oe :T#;

Cal!/late" ao/nt of one for a

s$e!ifie" tie $erio" fro whi!h the tax

lia9ilit is "eterine"&

Cal!/late" as=

T# B Gross #n!oe ex$enses "e$re!iation

T# B G# E CCA 12&1

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2014-#-01 %r& '& (& )ennett *&En&+ *(* ENGR 336012-10

12&1 Tax Rate T

A $er!entae or "e!ial e./ialent of T#&

The a$$li!a9le tax rate "e$en"s /$on the

total ao/nt of T#&

Taxes owe" e./als=

Taxes B :taxa9le in!oe; x :a$$li!a9le rate;

B :T#;:T;& 12&2

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2014-#-01 %r& '& (& )ennett *&En&+ *(* ENGR 336012-11

12&1 Net *rofit After Tax :N*AT;

Ao/nt of one reainin ea!h ear

when in!oe taxes are s/9tra!te" fro

taxa9le in!oe&

N*AT B T# :T#;:T;H+

B :T#;:1-T;& 12&3

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2014-#-01 %r& '& (& )ennett *&En&+ *(* ENGR 336012-12

Tax )ases in Cana"a

Fe"eral+ $roin!ial+ !ii!+ territorial taxes

)ase" on in!oe+ $ro$ert+ sales+ net

!a$ital inestent+ i$ort tax+ $ro"/!t

s$e!ifi! :li./or+ hotel+ air$ort;

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2014-#-01 %r& '& (& )ennett *&En&+ *(* ENGR 336012-13

A 8a" 8tor

'aes Cler7 (axwell+ the 9rilliant Enlish $hsi!ist+ was the first to inestiate the

$ro$erties of ele!tri!it& A $oliti!ian as7e"

hi what the al/e of this new "is!oerwo/l" 9e for the $eo$le of Enlan"&

(axwell re$lie" I # !annot thin7 of an

a$$li!ation s$e!ifi!all 9/t # a a9sol/tels/re that o/ will tax itJK

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2014-#-01 %r& '& (& )ennett *&En&+ *(* ENGR 336012-14

Cana"ian Cor$orate Tax Rate

Not tie" to in!oe :li7e $ersonal tax;)ase rate is 22&1 L 16 B 3 9/t an ex!e$tions a9o/n"

:$roies ar fro & :MC; to 16 :*E#+ 5N is 14;;

Taxa9le !a$ital O10+000+000+ sall 9/siness "e"/!tion

:8)%; a$$lies= 16 on first O300+000

Fe"eral tax a9ateent is 10 less :so sall firs $a 12J;

(an an" $ro!essin re9ate of if not elii9le for the 8)%

5ther re9ates for reso/r!e "eelo$ent+ s!ientifi! resear!h+enironental a!tions+ natie a!tiities+ et!&

ArhJ Call in Pawer Poo$holeJ

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2014-#-01 %r& '& (& )ennett *&En&+ *(* ENGR 336012-1

*roin!ial Taxes too

Rane fro & to 16

CRA !olle!ts these for the $roin!es ex!e$t

5N+ M)+ A)

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2014-#-01 %r& '& (& )ennett *&En&+ *(* ENGR 336012-16

Effe!tie Tax Rate Te

Te s/ of all taxes& Ranes fro 13-4

TeB :total taxes $ai";D:taxa9le in!oe;

*ortion of ea!h new "ollar of taxa9le

in!oe is !alle" the marginal tax rate

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2014-#-01 %r& '& (& )ennett *&En&+ *(* ENGR 336012-1

Exa$le 12&1

Freshflow is a Cana"ian-!ontrolle" $riate !or$orationin Fre"eri!ton+ N&)&+ that an/fa!t/res 9iofilters forwastewater treatent $lants& The !o$an ha" a rossin!oe of O00+000 an" CCA of O30+000 on their

$ro"/!tion a!hiner& Ex$enses were

Cost of $ro"/!tion B 20+000

8alaries an" 9enefits B 200+000

5ther ex$enses B 0+000

Total B O00+000

:a; What ao/nt of tax will the !o$an $a on theirfe"eral an" $roin!ial taxa9le in!oeQ

:9; What is the !o$ans effe!tie tax rateQ

i 12 Af C h l

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2014-#-01 %r& '& (& )ennett *&En&+ *(* ENGR 336012-1

8ol/tion to 12&1:a; Taxa9le in!oe B ross in!oe - ex$enses - CCA

T# B O00+000 - 00+000 - 30+000 B O30+000 Federal income tax. )e!a/se the !o$an ./alifies for the 8)%+ the firstO300+000 is taxa9le at a rate of 12 :3 - 16 - 10;&

Taxes B :taxa9le in!oe;:a$$li!a9le tax rate;

B :O300+000;:0&12; B O36+000

Freshflow ./alifies for the an/fa!t/rin an" $ro!essin $rofits "e"/!tion of on the reain"er of the in!oe taxa9le at the rate of 21 :3 - 10 -;&

Taxes B :O0+000;:0&21; B O14+00

Total fe"eral tax B O36+000 L 14+00 B O0+00

New Brunswick income tax. #n New )r/nswi!7+ O00+000 is the 9/siness liit/se" in !al!/latin the in!oe elii9le for the sall 9/siness rate of 1& #n!oea9oe O00+000 is taxe" at a rate of 13&*roin!ial tax $aa9le B :O30+000;:0&01; B O300

Total !o9ine" taxes B 0+00 L 300 B O4+400

U i 12 Af T C h Fl

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2014-#-01 %r& '& (& )ennett *&En&+ *(* ENGR 336012-1

Freshflows Effe!tie Tax Rate

Te B taxesDT# B 4+400D30+000 B 14&

U i 12 Af T C h Fl

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2014-#-01 %r& '& (& )ennett *&En&+ *(* ENGR 336012-20

*ersonal s& Cor$orate

#n"ii"/als re$ort total in!oeS

Gross earne" in!oeS

oweer+ in"ii"/als a not "e"/!t ost

of their ex$enses for "a to "a liin an"wor7in&

#n"ii"/als /st a$$l the ario/s stan"ar"or itei?e" "e"/!tions $eritte" 9 !/rrentlaw

Cor$orations "e"/!t a!t/al !ash flowex$enses&

U it 12 Aft T C h Fl

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2014-#-01 %r& '& (& )ennett *&En&+ *(* ENGR 336012-21

*ersonal s& Cor$orate

#n"ii"/al hae to file as either=

8inle+

(arrie"+

ea" of ho/sehol"&

Cor$orations hae no s/!h filin stat/s

other than filin as a !or$oration&


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2014-#-01 %r& '& (& )ennett *&En&+ *(* ENGR 336012-22

#n"ii"/al Fe"eral Tax Rates

First 36+3 1&

)etween 363 an" 2+6 22

)etween 2+ an" 11+2 26

5er 11+26 2

#n 5ntario+ we $a 0 of the FT&

There are also an tax !re"its

- $ensions+ t/ition+ "isa9ilit+ e"i!al+ "onations+ ifts


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2014-#-01 %r& '& (& )ennett *&En&+ *(* ENGR 336012-23

12&2 NET CA8 FP5W - NCF

NCF re$resents=

Cash #nflow Cash 5/tflows for a ien tie

$erio"&

For e!ono st/"ies the enineer willestiate the f/t/re net !ash flows asso!iate"

with the $ro>e!t oer the estiate" life of

the $ro>e!t& Now+ we "efine Cash Flow )efore Tax

:CF)T;&


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2014-#-01 %r& '& (& )ennett *&En&+ *(* ENGR 336012-24

12&2 Cash Flows )efore Tax : CF)T ;

CF)T=

A!t/al real !ash flows asso!iate" with an

inestent )EF5RE an in!oe tax

!onsi"erations are a$$lie"&CF)T "oes not !onsi"er "e$re!iation or

"e$letion ao/nts&

Unit 12 After Tax Cash Flow

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2014-#-01 %r& '& (& )ennett *&En&+ *(* ENGR 336012-2

12&2 CF)T %efine"

CF)T B

Gross in!oe ex$enses initial inestent L

salae al/e

CF)TB G# E * L 8 12& Note= %e$re!iation an" "e$letions ao/nts are not $art of

CF)T as the are not real !ash flows $er se&


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2014-#-01 %r& '& (& )ennett *&En&+ *(* ENGR 336012-26

12&2 Cash Flow After Tax : CFAT;

CFAT for a ien tie $erio" is "efine" as=

CFAT B CF)T Taxes&

The ITaxesK !o$onent /st 9e ex$an"e" to

in!l/"e the i$a!ts of "e$re!iation an"Dor"e$letion&

%e$re!iation is a noncash flow 9/t is

"e"/!ti9le fro G# an" seres to o"erate:lessen; the T# ao/nt&


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2014-#-01 %r& '& (& )ennett *&En&+ *(* ENGR 336012-2

12&3 After-tax Cash Flow Eal/ation

Ass/in the analst has estiate" all releant !ashflows an" !on"/!te" an ATCF analsis the e!onoi!

"esira9ilit of the !ash flow !an 9e "eterine"&

All te!hni./es $reio/sl $resente" !an 9e /se"+ e&&+

*resent Worth+

F/t/re Worth+

Ann/al Worth+

#RR+ & & &


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2014-#-01 %r& '& (& )ennett *&En&+ *(* ENGR 336012-2

8inle or (/lti$le Alternaties

8inle *ro>e!t=

*W or AW 0 at i or+

#RR i&

Two or (ore Alternaties=

8ele!t the alternatie with the larest *W or

AW al/e at the i rate&

#f /sin #RR+ /st a$$l the in!reentalanalsis a$$roa!h&


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2014-#-01 %r& '& (& )ennett *&En&+ *(* ENGR 336012-2

Analsis Te!hni./es

All $reio/s r/les a$$l=

For *W e./al lies

For AW re$eata9ilit ass/$tion a$$lies

8oe ATCF $ro9les inole onl !osts&

Cal!/late the after-tax sains enerate" 9

o$eratin ex$enses an" "e$re!iation an"

atta!h a $ositie sin to the sains&


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2014-#-01 %r& '& (& )ennett *&En&+ *(* ENGR 336012-30

After-tax %is!o/nt Rate

8oe firs a set a 9efore-tax "is!o/nt rate

(ARR )&T&&

For after-tax analsis+ the 9efore-tax (ARR

/st 9e a">/ste" 9 a$$lin=

(ARR After-Tax B (ARR )efore Tax:1-Te;

The )efore-tax (ARR ien the After-tax(ARR is=

(ARR )efore Tax B :(ARR After Tax;D:1-Te;


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2014-#-01 %r& '& (& )ennett *&En&+ *(* ENGR 336012-31

12&4 Re$la!eent= After-Tax

Reiew Cha$ter 11=This !ha$ter "i" not !onsi"er taxes in the analsis&

To $ro$erl eal/ate a re$la!eent t$e

$ro9le+ one sho/l" alwas /se an after-taxa$$roa!h&

Eleents s/!h as=

%e$re!iation an" "is$osal with $ossi9lere!a$t/re" "e$re!iation !an a7e a "ifferen!e in

the analsis&


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2014-#-01 %r& '& (& )ennett *&En&+ *(* ENGR 336012-32

Re$la!eent )asi!s

%efen"er AssetAsset !/rrentl in seri!eS

(a 9e tax i$li!ations 9 "is$osin of the

"efen"er :re!a$t/re" "e$re!iation;&The !/rrent 9oo7 al/e of the "efen"er is

nee"e"&

Challener AssetThe asset that iht 9e $/r!hase" or lease" to

re$la!e the "efen"er&


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2014-#-01 %r& '& (& )ennett *&En&+ *(* ENGR 336012-33

)/il"in a (o"el for Re$la!eent

Eleents that !an alter the ATCF s& a)TCF analsis for re$la!eent&

%e$re!iation an" the tax sains&

%is$osal i$li!ations of the "efen"er& Re!a$t/re" %e$re!iation or+

Poss on %is$osal

alf-ear !onention for "is$osal "/rin the life of

the "efen"er if it is not f/ll re!oere"&


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2014-#-01 %r& '& (& )ennett *&En&+ *(* ENGR 336012-34

12&

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2014-#-01 %r& '& (& )ennett *&En&+ *(* ENGR 336012-3

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2014-#-01 %r& '& (& )ennett *&En&+ *(* ENGR 336012-36

Cha$ter 12 8/ar

After-tax analsis "oes not /s/all !hanethe "e!ision to sele!t one alternatie oer

another&

ATCF "oes offer a /!h !learer estiate ofthe onetar i$a!t of taxes&

After-tax *W+ AW+ an" #RR eal/ations of

one or ore alternaties are $erfore" onthe CFAT series= /sin exa!tl the sae

$ro!e"/res as n $reio/s !ha$ters&


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2014-#-01 %r& '& (& )ennett *&En&+ *(* ENGR 336012-3

Cha$ter 12 8/ar !ont&

The after-tax (ARR is /se" in all *W an"AW !o$/tations+ an" in "e!i"in 9etween

two or ore alternaties /sin in!reental

#RR analsis& Generall the fir will a$$l two interest

rates=

(ARR al/e for 9efore-tax analsisS(ARR al/e for after-tax analsis&


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2014-#-01 %r& '& (& )ennett *&En&+ *(* ENGR 336012-3


#n!oe tax rates for in"ii"/al tax$aers arera"/ate"-hiher taxa9le in!oes $a hiher in!oe

taxes& Cor$orations :C%N; $a a flat tax&

A sinle-al/e+ effe!tie tax rate Te is /s/alla$$lie" in an after-tax e!onoi! analsis&

Taxes are re"/!e" 9e!a/se of tax-"e"/!ti9le ites=

"e$re!iation an"+

o$eratin ex$enses&


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2014-#-01 %r& '& (& )ennett *&En&+ *(* ENGR 336012-3


#n !o$/tin taxa9le in!oe+ $erissi9lenon-!ash flow ao/nts !an 9e a$$lie" to

o"erate T#=

%e$re!iation ao/nts+%e$letion ao/nts+

Aorti?ation ao/nts&

For CFAT analsis+ "e$re!iation an""e$letions ao/nts /st 9e !onsi"ere" as

$art of the analsis&


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2014-#-01 %r& '& (& )ennett *&En&+ *(* ENGR 336012-40


e eneral !ash flow after-tax relations forea!h ear are=

CF)T B ross in!oe - ex$enses - initial

inestent L salae al/e &CFAT B CF)T - taxes B CF)T - :taxa9le in!oe;:T

e;&


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2014-#-01 %r& '& (& )ennett *&En&+ *(* ENGR 336012-41


Taxa9le #n!oe :T#;=

T# B ross in!oe - ex$enses -

"e$re!iation L "e$re!iation re!a$t/re


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2014-#-01 %r& '& (& )ennett *&En&+ *(* ENGR 336012-42


#n a re$la!eent st/"+ the tax i$a!t of=

"e$re!iation re!a$t/re or

!a$ital loss+

either of whi!h a o!!/r when= the "efen"er is tra"e" for the !hallener an"+

(/st 9e a!!o/nte" for in an after-tax analsis&


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2014-#-01 %r& '& (& )ennett *&En&+ *(* ENGR 336012-43


The re$la!eent st/" $ro!e"/re of !ha$ter11 is a$$lie"&

The tax analsis a or a not reerse the

"e!ision to re$la!e or retain the "efen"er=)/t the effe!t of taxes will li7el re"/!e

:$ossi9l 9 a sinifi!ant ao/nt; the

e!onoi! a"antae of one alternatieoer the other&


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This !ha$ter seres to=Enfor!e the fa!t that enineers an" anaers

/st 9e aware of the !/rrent fe"eral tax laws

$ertainin to the analsis of in"/strial $ro>e!ts&ee$in /$ with CRA !o"e !hanes is a

!hallenin tas7 at 9est&

Cor$orations retain tax ex$erts to assist in the

$ro$er inter$retations of those eleents of the

!o"e that a$$l to CFAT analsis&

3360 UNIT 12 2014-I-01

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