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# Module14 - Decision-Making Preliminaries Estimating...

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Decision-Making Preliminaries Estimating After-Tax Cash Flows Part I

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Key Concepts Last Module: Depreciation and Taxes This Module: After-Tax Cash Flow Estimation Time to put it all together into a single cash flow for each period.
After-Tax Cash Flows Once we calculate taxes and subtract them from our profits, we still have to CALCULATE the after-tax cash flow. After-Tax Cash Flow Calculation:

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After-Tax Cash Flows Once we calculate taxes and subtract them from our profits, we still have to CALCULATE the after-tax cash flow. After-Tax Cash Flow Calculation: Revenues - Expenses (inc. Dep.) BT Income - Taxes AT Income + Depreciation + Loan Principal - Loan Principal Payment - Investment
After-Tax Cash Flows Once we calculate taxes and subtract them from our profits, we still have to CALCULATE the after-tax cash flow. After-Tax Cash Flow Calculation: Revenues - Expenses (inc. Dep.) BT Income - Taxes AT Income + Depreciation + Loan Principal - Loan Principal Payment - Investment ATCF = - Investments + Loan Principal Received + Loan Principal Paid + AT Proceeds of Asset Sale + tm (depreciation) + (1 – tm ) Revenue - (1 – tm ) Expenses = Net ATCF at time t

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After-Tax Cash Flow Example Your company purchases a \$200,000 asset classified as a 5-year property by the IRS. The asset is expected to generate \$500,000 per year in revenues against \$50,000 labor and \$100,000 material (annual) costs. Let us analyze this investment over a six- year horizon under a number of scenarios.
After-Tax Cash Flow Examples Let’s first examine the differences between using: MACRS percentages (DDB switch to SL for 5- year asset class) SL method with 1/2 year convention (often called Alternative SL) The tax rate is 35%

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MACRS Percentages
MACRS Percentages From MACRS Tables: \$200,000(.20)

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MACRS Percentages Revenues – Expenses (including Depreciatio
MACRS Percentages Taxable Income * Tax Rate

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MACRS Percentages Taxable Income – Taxes Paid
MACRS Percentages A/T Profit + Depreciation

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MACRS Percentages Sum of A/T Cash Flows: \$1,235,000 PW(10%) of A/T Cash Flows: \$844,950
Alternative Straight Line

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Alternative Straight Line Half of \$200,000/5
Alternative Straight Line Sum of A/T Cash Flows: \$1,235,000 PW(10%) of A/T Cash Flows: \$841,480 Depreciation timing changes value!

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Decision-Making Preliminaries Estimating After-Tax Cash Flows End Part I
Decision-Making Preliminaries Estimating After-Tax Cash Flows Part II

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After-Tax Cash Flow Examples Assume 3/4 of asset is paid for with a loan. Let’s analyze the following two loans: Equal total payments on a 6% loan paid back over five years Equal principal payments on a 6% loan paid back over five years Interest is an expense (tax deductible) Principal payments are just cash flows
Equal Total Loan Payments

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Equal Total Loan Payments Loan Balance * Loan Rate
Equal Total Loan Payments \$150K(A/P,6%,5)= \$35,609.46 - Interest Paid

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Equal Total Loan Payments A/T Profit + Depreciation – Loan Principal
Equal Total Loan Payments Sum of A/T Cash Flows: \$1,216,769 PW(10%) of A/T Cash Flows: \$867,84

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Equal Principal Payments
Loan Balance * Loan Rate Equal Principal Payments

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Loan Principal/Length of Loan Equal Principal Payments
Sum of A/T Cash Flows: \$1,217,450 PW(10%) of A/T Cash Flows: \$867,078 Equal Principal Payments

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Decision-Making Preliminaries Estimating After-Tax Cash Flows End Part II
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Module14 - Decision-Making Preliminaries Estimating...

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