Engineering Economic Analysis

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After-Tax Replacement Analysis 423

of the defender use the following steps:

1. Assume you are selling the defender now (time 0).


2. Find the ATCF for selling the defender at time O.


3. Then, because you are actually keeping the defender, not selling it, change all the
   signs (plus to minus, minus to plus) in the tax table used to develop the ATCF at
   time O.


4. Thus the ATCF for selling now becomes the after-taxopportunity costfor keeping
   the defender. Assign this cost to the defender at time O.

Find the after-tax first cost (today's cost) that should be assigned to a defender asset as described

by the following data:

First cost when implemented 5 years ago

Depreciation method

=$12,500

=Straight-line depreciation

(with estimated S= $2500,n=10 years)

=$8000

__ 10 years

• $3000
  =$4500
  =$1500
  =34%

Current market value

Remaining useful life

Ann1ialcosts

Annual benefits".

Market value after useful life

Compined tax rate

(for ordinary income and capital gainsllosses)

SOLUTION

The defender ~ign change procedure has four steps."

Steps1 and 2

A$sm;P.ethat we will sell the defender ndw (Time zero), then:

Yearl~ depreciation - ($12,500 - $2500)/10 =$1000 year

:aefore-tax cash flow=+8000

Gainsl:1osses=Current market value - Current book value

:=

Current market value- $8000

Currentbookvalue__Cost:basis=-Sumof depreciationcb.argesto date

12,500 - 5(1000)

12,500 - 5000- $75QO

;;;;: 8000."",'7:S00'=$500:()rdin~gain'(deprecia.tion :'re-c8.ptlirer=

Tax.eson gain= 500(-0.34)= -$170

After-fax ca§h flow = 8000 -- 170 __$7830

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