---
title: "General procedure for after-tax analysis"
subject: "Engineering Economics"
chapter: 7
key: "semester_6/engineering_economics:after-tax-analysis-procedure"
source: https://www.bctengineer.com/q/semester_6/engineering_economics/after-tax-analysis-procedure
site: BCT Engineering
---

# General procedure for after-tax analysis

Engineering Economics · Chapter 7: Depreciation and Corporate Income Taxes

- Asked in: 2072 Asoj, 4 marks
- Video: [Before and After Tax Cash Flow numerical |Board Exam Solution in NEPALI](https://www.youtube.com/watch?v=TKGdZa5zOvU) — OPengineer
- Answer checked by Claude Opus 5.5 (high effort) on 2026-10-14
- Page: https://www.bctengineer.com/q/semester_6/engineering_economics/after-tax-analysis-procedure
- Whole chapter: https://www.bctengineer.com/md/semester_6/engineering_economics/chapter-7

## Question

Explain the general procedure for after tax economic analysis with suitable example.

## Short answer

Convert BTCF to ATCF by subtracting income tax: compute taxable income as revenue minus operating costs minus depreciation, apply tax rate, and adjust for salvage tax effects. Then compute PW, AW, or IRR at the after-tax MARR. Example: ATCF Rs 40,000/yr gave PW > 0, making the project acceptable.

## Answer

After-tax analysis converts before-tax cash flows into **after-tax cash flows (ATCF)** and then applies PW, AW or IRR at the after-tax MARR.

#### General procedure
1. Estimate the before-tax cash flows (BTCF): investment, revenues, O&M costs and salvage value.
2. Choose the depreciation method (SL, DB, SOYD, MACRS) and compute depreciation for each year.
3. Compute taxable income = revenue − O&M expenses − depreciation (− interest if debt financed).
4. Compute income tax = taxable income × tax rate (a negative value is a tax saving if the firm has other taxable income).
5. Compute ATCF = BTCF − income tax. Add the tax effect of disposal: gain on sale (selling price − book value) is taxed; a loss gives a tax saving.
6. Draw the ATCF diagram and calculate PW, AW or IRR using the after-tax MARR.
7. Accept if PW ≥ 0 (or after-tax IRR ≥ MARR); for alternatives choose the best by the usual method.

#### Example
A machine costs Rs 1,00,000, lasts 4 years with zero salvage value, and gives Rs 50,000 per year before tax. Tax rate = 40%; SL depreciation; after-tax MARR = 8%.
```text
Depreciation = 1,00,000 / 4 = 25,000
Taxable income = 50,000 − 25,000 = 25,000
Tax = 0.40 × 25,000 = 10,000
ATCF = 50,000 − 10,000 = 40,000 per year (years 1 to 4)
PW = −1,00,000 + 40,000(P/A,8%,4) = −1,00,000 + 40,000(3.3121) ≈ +32,485
```
PW > 0, so the project is acceptable after tax. (Before-tax cash flow 50,000 gives PW = +65,606, which shows how tax reduces the return.)

## Check yourself

The answer's key points as multiple-choice questions, with the correct option and why.

1. What is the purpose of after-tax analysis?
   A. Convert BTCF to ATCF and evaluate at the after-tax MARR
   B. Ignore depreciation
   C. Compute only taxes
   D. Use the before-tax MARR
   Answer: A. PW, AW or IRR are applied to ATCF. (Key point: Core idea)

2. Which formula is used for taxable income?
   A. Revenue - O&M + depreciation
   B. Revenue - O&M - depreciation (- interest if financed)
   C. Revenue - taxes
   D. Revenue - investment
   Answer: B. Depreciation is deductible. (Key point: Taxable income)

3. How is disposal treated?
   A. Salvage is always tax-free
   B. Salvage is always taxed fully
   C. Gain over book value is taxed; a loss gives tax saving
   D. It is ignored
   Answer: C. Tax effect = (selling price - book value) x tax rate. (Key point: Disposal tax)

4. Machine 1,00,000, 4 years, no salvage, 50,000/yr, 40% tax, SL. What is yearly ATCF?
   A. Rs 50,000
   B. Rs 30,000
   C. Rs 25,000
   D. Rs 40,000
   Answer: D. Taxable 25,000; tax 10,000; ATCF 40,000. (Key point: Example)

## Related in Engineering Economics

- [After-tax cash flow, DDB with switchover](https://www.bctengineer.com/question.md?key=semester_6%2Fengineering_economics%3Aafter-tax-cash-flow-ddb-switchover) — Engineering Economics, chapter 7
- [After-tax cash flow, sinking fund depreciation](https://www.bctengineer.com/question.md?key=semester_6%2Fengineering_economics%3Aaftertax-cash-flow-sinking-fund-25000) — Engineering Economics, chapter 7
- [MACRS schedule and after-tax IRR by AW](https://www.bctengineer.com/question.md?key=semester_6%2Fengineering_economics%3Amacrs-after-tax-irr-aw-45000) — Engineering Economics, chapter 7
- [PW and IRR after tax with SL depreciation](https://www.bctengineer.com/question.md?key=semester_6%2Fengineering_economics%3Apw-irr-sl-tax-20-million) — Engineering Economics, chapter 7
- [Financial vs economic analysis; both BCR](https://www.bctengineer.com/question.md?key=semester_6%2Fengineering_economics%3Afinancial-vs-economic-bcr-300000) — Engineering Economics, chapter 3

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