CFBT (Cash Flow Before Tax): It remains constant at 3000 each year, which is the annual revenue minus
the annual operating expense (4000 - 1000).
Depreciation: It varies each year, depending on the depreciation method and the class life of the asset. In
this case, the straight-line depreciation method with half-year convention is used, which means the asset
is depreciated evenly over its class life, but only half of the depreciation is taken in the first and last year.
The depreciation rate is calculated by dividing 1 by the class life, which is 3 years in this case. Therefore,
the depreciation rate is 0.3333. The depreciation amount is calculated by multiplying the depreciation
rate by the purchase price, which is 6000 in this case. Therefore, the depreciation amount is 2000.
However, in the first and last year, only half of the depreciation amount is taken, which is 1000. That’s
why the depreciation column shows 1000, 2000, 2000, and 1000 for each year.
Taxable Income: Calculated by subtracting depreciation from CFBT. This is the amount of income that is
subject to tax.
Tax Benefit: Obtained by multiplying the taxable income by the tax rate, which is 40% in this case. This is
the amount of tax savings that the asset provides.
CFAT (Cash Flow After Tax): Calculated by adding tax benefit to CFBT. This is the amount of cash flow that
the asset generates after paying taxes.
PV @ 12%: The present value is calculated using a discount rate of 12%, which is the required rate of
return for the investment. It’s obtained by dividing CFAT by (1+0.12)^n where n is the year number. This
is the value of the cash flow in today’s terms, adjusted for the time value of money.
The NPV is calculated by summing up all the PV values and subtracting the initial investment, which
appears to be 6000 in this case as indicated in Year 0. This is the net value of the investment, taking into
account the initial cost and the future cash flows. A positive NPV means that the investment is profitable,
while a negative NPV means that the investment is unprofitable.
The tax benefit and the lost tax shield are not different, they are the same values but in reverse order.
This is because the depreciation method used in the buy alternative is the straight-line depreciation with
half-year convention, which means that the first and last year have half of the depreciation amount as
the other years. Therefore, the tax benefit is also halved in the first and last year. However, in the lease
alternative, the initial savings are equal to the depreciation amount, so they follow the same pattern as
the buy alternative. The lost tax shield is then calculated by subtracting the initial savings from the tax
benefit. This results in the same values as the tax benefit, but in reverse order. For example, in Year 1,
the tax benefit is 800, the initial savings are 400, and the lost tax shield is 800 - 400 = 400. In Year 4, the
tax benefit is 400, the initial savings are 1000, and the lost tax shield is 400 - 1000 = -600. However, since
the lost tax shield cannot be negative, it is assumed to be zero. Therefore, the lost tax shield is 400 in
Year 4. I hope this makes sense.