After-tax MARR

The after-tax MARR is the Minimum acceptable rate of return taken net of corporate income tax: the hurdle a project must clear when both the cash flows and the discount rate are after-tax.

The approximate relationship to the before-tax MARR is

${\text{MARR}}_{\text{after-tax}}\approx {\text{MARR}}_{\text{before-tax}}\cdot (1-t),$

where $t$ is the marginal corporate tax rate. Returns get taxed before they’re enjoyed, so a 12% before-tax return becomes about $12\times (1-0.27)=8.76\%$ after-tax for a corporation in the 27% bracket.

Two MARRs because there are two parallel ways to do project analysis:

1. Before-tax analysis. Use before-tax cash flows (no $(1-t)$ applied to operating profits, no CCA tax shields). Discount at the before-tax MARR. Get PW.

2. After-tax analysis. Use after-tax cash flows (multiply operating profits by $(1-t)$, include all CCA tax shields via CTF and CSF). Discount at the after-tax MARR. Get PW.

Both should agree (up to the approximation in the rate conversion) on whether a project clears the bar. But for comparison among alternatives they can disagree if the alternatives have meaningfully different CCA profiles: an asset with a high CCA rate gets a bigger tax shield, which only shows up in the after-tax analysis. After-tax analysis is the more accurate framework when taxes are material.

Pitfall. Don’t apply both adjustments at once. If you’ve taken the cash flows down by $(1-t)$, don’t also use the before-tax MARR. That double-counts the tax effect and gives the wrong answer. The two approaches are parallel, not stackable.

In practice, large firms publish an internal MARR table that already specifies after-tax for use with after-tax analyses, and the convention is clear. In academic exercises, “MARR” without qualifier usually means before-tax in problems that don’t mention tax, and after-tax in problems that do.

For the broader tax framework see Corporate income tax.