Question 9.10: After-Tax Investment Cost of a Defender: BV > MV An exist...

Engineering Economy

After-Tax Investment Cost of a Defender: BV > MV

An existing asset being considered for replacement has a current MV of $12,000 and a current BV of $18,000. Determine the after-tax investment value of the existing asset (if kept) using the outsider viewpoint and an effective income tax rate of 34%.

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Given that MV $_{0}$ = $12,000, BV $_{0}$ = $18,000, and t = 0.34, we can easily compute the ATCF associated with keeping the existing asset by using the format of Figure 9-5:

nd of Year, k	BTCF	Depreciation	Taxable Income	Cash Flow for Income Taxes	ATCF
0	−$12,000	None	−($12,000 − $18,000) = −$6,000	(−0.34)(−$6,000)=$2,040	−$12,000 – $2,040 = −$14,040

The appropriate after-tax investment value for the existing asset is $14,040. Note that this is higher than the before-tax investment value of $12,000, owing to the tax credit given up by not selling the existing machine at a loss.

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