EUAC of initial ist AP L

Step 2:

Calculate the annual net income after tax (IAT) for years 1 and 2.

Year Income

Expense

250000

225000

100000

105000

150000

120000

Depr. Taxable Income

100000

100000

50000

20000

20000

8000

This is the tax due to the operating income. Now we have to calculate the effect of capital gain or loss.

Year Resale Book Value Capital Gain/Loss Tax On Cap G/L

250000

300000

-50000

-20000

The cash flow then is

EUAC of initial cost = - 500000 (A/P, 8. 2) = - 2B0400

500,000

EUAC of initial cost = - 500000 (A/P, 8. 2) = - 2B0400

EUAB of operation = [130000 (P/F, S,t) +112000 (P/F, 3, 2)) (A/P, S. 2) -I2134S EUAB of resale - 270000 (A/F, 3,2) -129816

We have to keep repeating the process until we get either a dip or an acme on the plot of EUAW against the number of years. The following spreadsheet constructed with the same procedure will provide us with the answer.

Calculation Euac

Note: Example 14.2 is a special version of Example 14.3, and the same results can be obtained by using a zero tax rate in the spreadsheet of Example 14.3.

The spreadsheet table looks very similar to the tables used for the manual calculations. In fact, the table can also be used for manual calculation by calculating and inserting the numbers rather than having the computer do it. Notice the PW, Yr. 1-n column. This column is the NPW of all the annual cash flows from year 1 to the year n. The initial cost column under the

EUAW part of the table calculates the EUAW corresponding to the NPW for each year. Also notice that the introduction of tax into the game has resulted in less total income.

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