Determining After Tax Earnings

While some simplified project analyses may deal with gross operating profit or pre-tax revenues, the ultimate value of an investment is based on its anticipated net, or after-tax, financial impact on a cash, and sometimes, book basis. The following definitions are useful when considering net financial impact:

• Gross operating profit is the difference between total revenue and the sum of all operating costs. This is referred to in accounting terms as earnings before interest, taxes, and depreciation and amortization

• Earnings before interest and taxes (EBIT) is EBIT-

DA minus book depreciation and amortization on the asset.

• Pre-tax book income is EBIT minus any interest on any project debt. This is also called earnings before taxes (EBT).

• Taxable income is EBITDA minus interest, as well as tax depreciation and amortization on the asset. Often, taxable income will be less than EBT because tax depreciation is commonly accelerated in the early years, as compared to straight-line book depreciation.

• Taxes are equal to the product of the applicable federal, state, and local income tax rates and EBT. Current taxes are equal to the product of the applicable federal, state, and local income tax rates and taxable income. Deferred taxes are equal to the difference between taxes and current taxes. Current taxes are owed in the year the income is recognized, while deferred taxes accrue as a liability on the project's balance sheet and are paid during years in which taxable depreciation is less than book depreciation.

• After-tax cash flow is EBITDA minus any interest and principal on any project debt, as well as current taxes.

• After-tax earnings, or net income, is EBT minus taxes.

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