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CTC 475 Review

CTC 475 Review. Taxes Types of taxes Income tax is graduated ATCF Calculate Depreciation BTCF-Depreciation=TI Tax=TI*tax rate ATCF=BTCF-Tax. CTC 475. Effect of interest on ATCF. Objective. Know how to develop an ATCF taking into account both depreciation and interest on borrowed money.

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CTC 475 Review

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  1. CTC 475 Review • Taxes • Types of taxes • Income tax is graduated • ATCF • Calculate Depreciation • BTCF-Depreciation=TI • Tax=TI*tax rate • ATCF=BTCF-Tax

  2. CTC 475 Effect of interest on ATCF

  3. Objective • Know how to develop an ATCF taking into account both depreciation and interest on borrowed money

  4. Tax Concepts • Depreciation is not a cash flow but is needed to determine taxes • Interest on borrowed money is a cash flow and is also needed to determine taxes

  5. Interest • Can finance a project with equity (owner’s funds) or debt (borrowed funds) • If money is borrowed principle and interest must be repaid • Interest is a cash flow and affects taxable income • Principle is a cash flow but does not affect taxable income

  6. Methods for borrowing money • Periodic payment of interest with all principle being repaid at end of repayment period. • Uniform payment of principle. • Uniform payment of (principle and interest). • Pay nothing until end of repayment period.

  7. Example Problem-Method 1-4 • Borrowed amount = $40K • $40K borrowed at 18% per year over 5 years; equal payments • 18% per year compounded annually • Repayment period-5 years

  8. Method 1-Pay Interest Periodically

  9. Method 2-Pay Principal Periodically

  10. Method 3-Uniform Payment

  11. Method 4-Pay All at End

  12. Example Problem-ATCF • Cost Basis = $82K • $42K equity • $40K borrowed at 18% per year over 5 years; equal payments • Salvage Value = $5K • Estimated useful life = 7 years • MARR=15% • Reduction in expenses =$23.5/yr • Depreciate using MACRS-GDS • 5-year property • Determine PW of BTCF & ATCF

  13. PW of BTCF • PW=$17,649 (BTCF) • PW=$3,010 (BTCF-depreciation only and all equity)

  14. ATCF-Calculate Depreciation

  15. Calculate Payment Size • Assume method 3 (uniform payment) • Payment Size, A=$40,000(A/P18,5) • Payment size = $12,792

  16. Calculate Interest & Principle

  17. PW of ATCF • Must take each year back to zero (no series because each year has a different number) • PW=-$42K+$10,743(P/F15,1)+$13,746(P/F15,2) +$9,774(P/F15,3)+$7,156(P/F15,4) +$5,695(P/F15,5)+$17,116(P/F15,6) +$15,510(P/F15,7)+$3,300(P/F15,7) • PW of ATCF=$6,010 (cost effective and higher than if company had funded 100% with equity)

  18. ATCF’s are impacted by: • Depreciation methods • Recovery period • Planning horizon • Different tax rates • Interest rates on borrowed money

  19. Next lecture • Sensitivity Analyses • Optimistic-Pessimistic

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