Morales, Palma, Pontanares Technical Report 11: After Tax Analysis

Instructor: BS AeE 2-6 Grade:

Engr. Augustine Buenaventura June 30, 2020 Page: 1 of 7

1. Describe a fundamental difference between each of the following terms: net

operating income (NOI), taxable income (TI), and net operating profit after taxes
(NOPAT).
a. Net operating income (NOI) is a calculation used to analyze the profitability of income-
generating real estate investments. NOI equals all revenue from the property, minus all
reasonably necessary operating expenses. NOI is a before-tax figure, appearing on a property’s
income and cash flow statement that excludes principal and interest payments on loans, capital
expenditures, depreciation, and amortization. When this metric is used in other industries, it is
referred to as “EBIT”, which stands for “earnings before interest and taxes”.

b. Taxable income is the amount of income used to calculate how much tax an individual or a
company owes to the government in a given tax year. It is generally described as adjusted gross
income (which is your total income, known as “gross income,” minus any deductions
or exemptions allowed in that tax year). Taxable income includes wages, salaries, bonuses, and
tips, as well as investment income and unearned income.

C.Net operating profit after tax (NOPAT) is a financial measure that shows how well a company
performed through its core operations, net of taxes. NOPAT is frequently used in economic value
added (EVA) calculations and is a more accurate look at operating efficiency for leveraged
companies. NOPAT does not include the tax savings many companies get because of existing
debt.
Morales, Palma, Pontanares Technical Report 11: After Tax Analysis

Instructor: BS AeE 2-6 Grade:

Engr. Augustine Buenaventura June 30, 2020 Page: 2 of 7

2. For a year in which there is no initial investment P or salvage value S, derive an

equation for CFBT that contains only the following terms: CFAT, CFBT, D, and T.
CFBT = CFAT + Taxes CFBT = CFAT +TI (Te)
CFBT = CFAT + (GI – OE –D) (Te) CFBT = CFAT + (CFBT –D) (Te)
CFBT = 𝑪𝑭𝑨𝑻−(𝐓𝐞)/ 𝟏−𝐓𝐞
3.Four years ago Sierra Instruments of Monterey, California spent $200,000 for
equipment to manufacture standard gas flow calibrators. The equipment was
depreciated by MACRS using a 3year recovery period. The gross income for year 4
was $100,000, with operating expenses of $50,000. Use an effective tax rate of 40%
to determine the CFAT in year 4 if the asset was (a) discarded with no salvage value
in year 4 and (b) sold for $20,000 at the end of year 4 (neglect any taxes that may
be incurred on the sale of the equipment). The MACRS depreciation rate for year 4
is 7.41%. (a. $35,928; b. $55,928)
Given: Required:
Manufacturing Cost = $200,000 CFAT =?
Recovery Period = 3 years
GI = $100,000
OC = $50,000
TE = 40%
MACRS depreciation Rate for year 4 = 7.41%
Solution:
CFAT = GI - OC - P + S - (GI - OC - D) TE
a.
P and S = 0;
D = $200,000 (7.41%)
D = $14,820
CFAT = $100,000 - $50,000 - ($100,000 - $50,000 - $14,820) (40%)
CFAT= 35,928
b.
S = 20k
D = $200,000 (7.41%)
D = $14,820
CFAT = $100,000 - $50,000 + $20,000 - ($100,000 - $50,000 - $14,820)(40%)
CFAT = 55,928
Morales, Palma, Pontanares Technical Report 11: After Tax Analysis

Instructor: BS AeE 2-6 Grade:

Engr. Augustine Buenaventura June 30, 2020 Page: 3 of 7

4. Cheryl, an electrical engineering student who is working on a business minor, is

studying depreciation and finance in her engineering management course. The
assignment is to demonstrate that shorter recovery periods require the same total
taxes, but they offer a time value of taxes advantage for depreciable assets. Help
her, using asset estimates made for a 6-year study period: AOC is $10,000 per year,
SL depreciation. Make the comparison using recovery periods of 3 and 6 years.
Given:

AOC = $10,000/year

Required:

Compare Recovery Periods for 3 and Recovery Period = 6 years 6 years

Solution:
Recovery over 3 years:
SL Depreciation = $60,000/3
SL Depreciation = 20k per year
Year 1-3: Taxes = (GI - OE - D) (Te)
Tax = ($32,000 - $10,000 - $20,000) (0.31)
Tax = $620
Years 4-6: Taxes = (GI - OE) (Te)
Tax = ($32,000 - $10,000) (0.31)
Tax = $6,820
Total = 3($620) + 3($6,820) = $22,320
PWtax = $620(P/A, 12%, 3) + $6,820(P/A, 12%, 3) (P/F, 12%, 3)
PWtax = $620(2.4018) + $68,20(2.4018) (0.7118)’
PWtax =13,149
Morales, Palma, Pontanares Technical Report 11: After Tax Analysis

Instructor: BS AeE 2-6 Grade:

Engr. Augustine Buenaventura June 30, 2020 Page: 4 of 7

Recovery over 6 years: SL depreciation is 60k/6 = 10k per year

Years 1-6: Taxes = (GI-OE-D) (Te)
Tax = ($32,000 - $10,000 -$10,000)(0.31) = $3,720 Total = 6($3,720) = $22,320
PWtax = $3,720(P/A, 12%,6)
PWtax = $3,720(4.1114)
PWtax =15,294

5. Choose between alternatives A and B below if the after-tax MARR is 8% per year,
MACRS depreciation is used, and T= 40%. The GI-OE estimate is made for only 3
years; it is zero when each asset is sold in year 4.
Given:
Alternative A Alternative B
-8,000 -13,000
0 2,000
3,5000 5,000
3 3
Required:
Choose between Alternatives A and B
Solution:
Alternative A:

Year P&S GI-OE D TI Taxes CFAT

0 -8,000 - - - - -8,000
1 3,500 2,666 834 333 3,167
2 3,500 3,556 -56 -22 3,522
3 3,500 1,185 2,315 926 2,574
4 0 0 593 -593 -237 237

PWA=P&S0+CF AT1 (P/F,i,n1)+ CFAT2 (P/F,i,n2) + CFAT3 (P/ F,i,n3) + CFAT4 (P/F,i,n4)
PWA=-$8,000+ $3,167 (P/F,8% ,1)+ $3,522 (P/F,8%,2) + $2, 574 (P/F,8%,3) + $237 (P/F,8%,4) +
PWA=$169
Morales, Palma, Pontanares Technical Report 11: After Tax Analysis

Instructor: BS AeE 2-6 Grade:

Engr. Augustine Buenaventura June 30, 2020 Page: 5 of 7

Alternative B:
Year P&S GI-OE D TI Taxes CFAT
0 -13,000 - - - - -13,000
1 5,000 4,333 667 267 4,733
2 5,000 5,779 -779 -311 5,311
3 5,000 1,925 3,075 1,230 3,770
4 0 0 963 -963 -385 385
2,000 - - 2,000 800 1,200

PWA=P&S0+CFAT1 (P/F,i,n1)+ CFAT2 (P/F,i,n2) + CFAT3 (P/F,i,n3) + CFAT4 (P/F,i,n4) + CFAT

(P/F,i,n4)
PWA=-$13,000+$4,733 (P/F,8%,1)+ $5,311 (P/F,8%,2) + $3,770 (P/F,8%,3) + $385 (P/F,8%,4)
+ $1,200 (P/F,8%,4)
PWB=$93
PWA > PWB; SELECT Alternative A

6. Offshore platform safety equipment, designed for special jobs, will cost
$2,500,000, will have no salvage value, and will be kept in service for exactly 5 years,
according to company policy. Operating revenue minus expenses is estimated to be
$1,500,000 in year 1 and only $300,000 each additional year. The effective tax rate
for the multinational oil company is 30%. Find the aftertax ROR using (a) classical
SL depreciation.
Given: Required:
P = $2,500,000 n=5 years After-Tax ROR =?
S=0
TE = 30%
R– E1 = $1,500,000(Year 1)
R – E2 = $300,000(Each additional Year)
Solution:
Classical SL:

D=

D=
Morales, Palma, Pontanares Technical Report 11: After Tax Analysis

Instructor: BS AeE 2-6 Grade:

Engr. Augustine Buenaventura June 30, 2020 Page: 6 of 7

D = $500,000
YEAR 1:
Taxes1 = [(R-E1)-D] (TE)
Taxes1 = ($1,500,000-$500,000) (30%)
Taxes1 = $300,000
CFAT = (R-E1) – Taxes
CFAT = $1,500,000 - $300,000
YEARS 2-5
Taxes2-5 = (Taxes1 –D) (TE)
Taxes2-5 = ($300,000 –$500,000) (30%)
Taxes2-5 = -$60,000
ROR in 5 years:
0 = P +[(R-E1)+Taxes1](P/F,i,1)+[( R – E2)+Taxes2](P/F,i,1)
0 = $2,500,000 + ($1,500,000-$300,000) (P/F, i, 1) + ($300,000+$60,000) (P/A, i, 4) (P/F, i,
1) At 2%
0 = -$2,500,000 + ($1,200,000) (P/F, 2%, 1) + ($360,000) (P/A, i, 4) (P/F, 2%, 1)
0 = -$723.3796296
At 3%
0 = -$2,500,000 + ($1,200,000) (P/F, 3%, 1) + ($360,000) (P/A, i, 4) (P/F, 3%, 1)
0 = -$977.0410431
Interpolating between 2% and 3%:
A.2% D. -$977.0410431
B. i E. -$723.3796296
C. 3% F. 0
Solve:

;
Morales, Palma, Pontanares Technical Report 11: After Tax Analysis

Instructor: BS AeE 2-6 Grade:

Engr. Augustine Buenaventura June 30, 2020 Page: 7 of 7

Find B

𝐵 = 2.350661538
ROR = 2.36%