Earnings after-tax

B = net earnings after taxes (50%) per annum for the coming period in which the investment should be payed back ... 

Suppose that an investment of 100,000 will earn after-tax profits of 10,000 per year over 20 years. Due to uncertainties in forecasting, however, the projected after-tax profits may be in error by 20 percent. Discuss how you would determine the sensitivity of the rate of return to an error of this type. Would you expect the rate of return to increase by 20 percent of its computed value for a 20-percent increase in annual after-tax profits (i.e., to 12,000) ... 

Annual cash flow. The annual cash flow (ACF) is the sum of the earnings after taxes and the depreciation for a one-year period. 

Figure 1. Graphs of after-tax earnings. After-tax earnings as percentage of stockholders equity or total assets (A). Total chemical industry return on total assets (-),...

Distributed Darnings. The dividends distributed to stockholders provide the earning on equity capital ia the same way that iaterest is the earning on the debt capital. However, the dividends are an after-tax expense and represent an arbitrary management decision. 

Detained Darnings. After the equity earnings are subtracted from the net after-tax earnings, the balance is called the retained earnings and represents an iacrease ia equity. The retained earnings can be visualized theoretically as the new cash generated beyond that needed to provide for a return to iavestors and an orderly retirement of the investment. 

Net earnings in first year (after taxes) = 50% of 1.25 million... 

The return on investment is the expected profit divided by the total capital invested. This is the percentage return that an investor may expect to eventually earn on his money. Since the federal corporate income tax rate is around 48% on all profits, it must be stated whether the profit is the before- or after-tax earnings. 

Both methods assume that the money earned can be reinvested at the nominal interest rate. Suppose the rates of return calculated are after tax returns and the company is generally earning a 5% or 6% return on investment. Is it reasonable to expect that all profits can be reinvested at 23% or even 20% No, it isn t Yet this is what is assumed in the Rate of Return method. Sometimes the rate of return may be as high as 50%, while a reasonable interest rate is less than 15%. Therefore if a reasonable value for the interest rate has been chosen (this is discussed later in this chapter) and the two methods differ, the results indicated by the Net Present Value method should be accepted. 

One advantage to loans and bonds is that the interest paid can be deducted from profits before taxes are figured, whereas the dividend paid stockholders is an after-tax expense. In 1971 the income tax rate was 48% of all earnings. If the interest rate at that time was 10%, then after taxes it would equivalently be 5.2%. In other words, for each dollar spent on interest the profits would be reduced 1.00 and the... 

Assume the retained earnings are worth 10% after taxes. (Issuing new stock has administrative costs and it must be sold for less than the market value.)... 

On the other hand, Union Carbide was plagued by all sorts of problems in starting up its chemical complex at Taft, La. It was reported that startup problems reduced corporation after-tax earnings by 30,000,000 and set the time schedule for full production back 18-24 months.12... 

Three projects (A, B, C) all earn a total of 125,000 over a period of 5 years (after-tax earnings, nondiscounted). For the cash-flow patterns shown in the table, predict by inspection which project will have the largest rate of return. Why ... 

The third statement shown in Figure B. 10 is for income and expense that leads to net after-tax profits (earnings), a quantity that transfers to the balance sheet periodically in the category called equity. 

The reconciliation between the cash flow statement and the income and expense statement is as follows. Start with the 40,000 from the last line in the cash flow statement, subtract 20,000 for the depreciation expense, and add back the 30,000 mortgage loan principal payment (not an allowed expense). The result is the net after-tax earnings. Figure B.ll is a set of statements from a small oil company. The statement of operations lists revenue and expenses, whereas the balance sheet lists various assets, liabilities, and stockholders equity ( net worth ). So-called capital items such as buildings, equipment, oil and gas property, and various intangibles are assets. Operating costs are deductions from revenues for operations not including expenditures for capital items. 

Net income (4) Basis for earnings per share calculation/net operating profit after taxes... 

The first major attempt to evaluate the quality of business operating results was the Stern Stewart EVA computation, a proprietary complicated formula that can make up to 160 adjustments to reported earnings of public companies. A component of EVA is to determine a firm s net operating income after tax and while it may accomplish this objective, it has been criticized because it relies on data that, as stated earlier, can be managed (Brewer Chandra, 1999). It was more than a decade before Wall Street analysts accepted EVA, and today its use is widespread in the corporate world, but not as much as in the investment world. 

Depending on the tax laws in effect, not all start-up costs can be expensed and a portion must be capitahzed. Start-up costs can reduce the after-tax earnings during the early years of a project because of a delay in the start-up of production causing a loss of earnings. Construction changes are items of capital cost, and production start-up costs are ejq)ensed as an operating expense. 

Two other measures that can be used to evaluate the profitability of a product are the return on investment and the payback period. The return on investment (ROZ) is the expected profit divided by the total capital invested, expressed as a percentage return. It must be clearly stated whether the profit is based on pre-tax or after-tax earnings. The after-tax ROI is compared with the earnings that could be achieved by an alternative investment, e.g. capital bonds. An after-tax ROI of at least 15-20% is usually expected (or 30-40% pre-tax ROI), assuming that the project is not particularly risky ... 

With the tax deducted from the PBT, the net profit, net earnings or profit after tax (PAT) is determined, to be the prime source of real income for the project, but not the only one. 

Expenses, as outlined in Chap. 8, for various types of taxes and insurance can materially affect the economic situation for any industrial process. Because modem taxes may amount to a major portion of a manufacturing firm s net earnings, it is essential that the chemical engineer be conversant with the fundamentals of taxation. For example, income taxes apply differently to projects with different proportions of fixed and working capital. Profitability, therefore, should be based on income after taxes. Insurance costs, on the other hand, are normally only a small part of the total operational expenditure of an industrial enterprise however, before any operation can be carried out on a sound economic basis, it is necessary to determine the insurance requirements to provide adequate coverage against unpredictable emergencies or developments. 

The total capital investment for a proposed chemical plant which will produce 1,500,000 worth of goods per year is estimated to be 1 million. It will be necessary to do a considerable amount of research and development work on the project before the final plant can be constructed, and management wishes to estimate the permissible research and development costs. It has been decided that the net profits from the plant should be sufficient to pay off the total capital investment plus all research and development costs in 7 years. A return after taxes of at least 12 percent of sales must be obtained, and 34 percent of the research and development cost is tax-ffee (i.e., income-tax rate for the company is 34 percent of the gross earnings). Under these conditions, what is the total amount the company can afford to pay for research and development ... 

The total investment required for a new chemical plant is estimated at 2 million. Fifty percent of the investment will be supplied from the company s own capital. Of the remaining investment, half will come from a loan at an effective interest rate of 8 percent and the other half will come from an issue of preferred stock paying dividends at a stated effective rate of 8 percent. The income-tax rate for the company is 30 percent of pre-tax earnings. Under these conditions, how many dollars per year does the company actually lose (i.e., after taxes) by issuing preferred stock at 8 percent dividends instead of bonds at an effective interest rate of 6 percent ... 

Complete fire and allied-coverage insurance for one unit of a plant requires an annual payment of 700 based on an investment value of 100,000. If income taxes over a IO-year period average 30 percent of gross earnings, by how much is the net income, after taxes, reduced during this lo-year period owing to the cost of the insurance ... 

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