Engineering Economy 7th Edition by Leland Blank ,Anthony Tarquin

Exercise 9

The engineer must make a recommendation on the fi­nancing plan by the end of the day. He does not know how to consider all the tax angles for the debt financing in plan A. However, he does have a handbook that gives these relations for equity and debt capital about taxes and cash flows:
Equity capital: no income tax advantages
After-tax net cash flow
= (before-tax net cash flow)(1 - tax rate)
Debt capital: income tax advantage comes from interest paid on loans
After-tax net cash flow = before-tax net cash flow
- loan principal
- loan interest - taxes
Taxes = (taxable income)(tax rate)
Taxable income = net cash flow
- loan interest
He decides to forget any other tax consequences and use this information to prepare a recommendation. Is A or B the better plan