Engineering Economic Analysis

After-TaxReplacement Analysis 425

Straight-line

Depreciation

$400

400

o

o

o

*If sold for $200, there would be a $600 loss on disposal. If $600 of gains were offset by the loss during

the year, there would be no gain to tax, saving 34% x $600 ',= $204. If the SK-30 is not sold, this loss is

not realized, and the resulting income taxes will be a $204 higher than if it had been sold.

tThis .~sthe sum of the $200 selling"price forgone plus the $204 income tax saving forgone.

tGainILoss =Market value-Book value= 0 - [1600-(4)400] =O.

EUAC=[404- 83(P f A,8%, 2) +53(P fA, 8%,3)(P f F,8%,2)](Af P,8%,5)

= $93

AlternativeB

Our second option is to purchase an EL-40. Use the following datato compute the after-tax cash

flow.

-I

I

I

II

COqJ.put~.the EUAC:

gUAC '. [1050-147(1:'/ A,8%,4) .,.,.(79 +250)(P f F,8%,5)](Af P,8%, 5)

- - !"'!'-- -. -. ... "" - - 08! =:; = '::;;

...

'

..'-~

... =;:;:;: == =- ~ - -- -.. -

- - - -- -r- -=,$8.J

..Based~4~s~1i~~..EL4Qj$=tJJ~f~qP:9~lnnati~e,,=== ~ = ==:= O!!:

Before-Tax

Year Cash Flow

(Sell)^0 $200

(Keep)^0 -200

1 -80

2 -80

3 80

4 -80

(^5) -80
(^5) o Salvage
Taxable 34% Income After-Tax
Income Taxes CashFlow
-$600 $204 $404 ='
+600 -204* -404t
-480 +163 +8}
-480 +163 +83
-80 +27 -53
-80 +27 -'-53
-80 +27 -53
ot 0 0

.. Before-Tax Straight-Line Taxable 34% Income After-Tax

Year Cash Flow Depreciation Income Taxes Cash Flow

0 -$1050 -'-$1050

1 +120 $200 ---$80 +$27 +1'4-7

(^2) +120 200 -80 +27 +147 I
(^3) +120 200 -80 +27 +147 I il
(^4) +120 200 -80 +27 +147
(^5) +120 (^0) +120 ......41 -79
,is +250 0*^0 +250

*ss =Market value - Book value= 250 - [1050 - (4)200] =O.