Chapter 13 Income Taxes

Chapter 13 Income Taxes 185
6 14,000 - 10,000 4,200 9,800
$4,000 capital recovery in year 6 is not taxable.
13-7
An asset with five year MACRS* life will be purchased for $10,000. It will produce net annual
benefits of $2,000 per year for six years, after which it will have a net salvage value of zero and
will be retired. The company’s incremental tax is 34%. Calculate the after tax cash flows.
*The MACRS annual percentages are 20, 32, 19.20, 11.52, 11.52, and 5.76 for years 1 through 6.
Solution
Year BTCF Depreciation T.I. Taxes ATCF
0 -10,000 -10,000.00
1 2,000 2,000 0 0 2,000.00
2 2,000 3,200 -1,200 -408.00 2,408.00
3 2,000 1,920 80 +27.20 1,972.80
4 2,000 1,152 848 +288.32 1,711.68
5 2,000 1,152 848 +288.32 1,711.68
6 2,000 576 1,424 +484.16 1,515.84
13-8
A state tax of 10% is deductible from the income taxed by the federal government. The federal
tax is 34%. The combined effective tax rate is
a. 24.0%
b. 35.0%
c. 40.6%
d. 45.0%
Solution
Effective rate = S + (1 - S)F
= .1 + (1 - .1).34
= .1 + (.9).34
= .1 + .306
= .406 = 40.6%
The answer is c.
13-9
For engineering economic analysis a corporation uses an incremental state income tax rate of 7.4%
and an incremental federal rate of 34%. Calculate the effective tax rate.