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8/9/2019 Su14 IE 343 Session 25
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Session 25Income Taxes
7/22/2014 IE 343, Summer 2014, Engineering Economy (Sullivan, 16th)
8/9/2019 Su14 IE 343 Session 25
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Types of Taxes
Income taxes are assessed as a function of gross revenues mallowable expenses.
Property taxes are assessed as a function of the value of proowned.
Sales taxes are assessed on the basis of purchase of goods o
Excise taxes are federal taxes assessed as a function of the scertain goods or services often considered nonnecessities.
7/22/2014 IE 343, Summer 2014, Engineering Economy (Sullivan, 16th)
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Income Taxes
Up to this point, we have not considered income taxes in oudiscussion of engineering economy.
We will now observe how income taxes affect a projects estcash flows.
Income taxes resulting from the profitable operation of a firm are account in evaluation engineering projects.
7/22/2014 IE 343, Summer 2014, Engineering Economy (Sullivan, 16th)
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After-tax MARR
Taking taxes into account changes our expectations of returprojects, so our MARR (after-tax) is lower.
Going forward, we will primarily use and be given after-tax Mvalues.
7/22/2014 IE 343, Summer 2014, Engineering Economy (Sullivan, 16th)
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Taxable Income
Depreciation is not a cash flow, but it affects a corporationsincome, and therefore the taxes a corporation pays.
Taxable Income = gross income
all expenses except capital investments depreciation deductions
7/22/2014 IE 343, Summer 2014, Engineering Economy (Sullivan, 16th)
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Taxable Income (example)
7/22/2014 IE 343, Summer 2014, Engineering Economy (Sullivan, 16th)
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Taxable Income (example)
7/22/2014 IE 343, Summer 2014, Engineering Economy (Sullivan, 16th)
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Federal vs. State Tax
7/22/2014 IE 343, Summer 2014, Engineering Economy (Sullivan, 16th)
Federal taxes are calculated using a set of income brackets, applying a different tax rate on the marginal value of income
State taxes vary widely, but usually are in the range of 6 12
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Federal Tax Rates
7/22/2014 IE 343, Summer 2014, Engineering Economy (Sullivan, 16th)
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Income Taxes (example)
7/22/2014 IE 343, Summer 2014, Engineering Economy (Sullivan, 16th)
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Income Taxes (example)
7/22/2014 IE 343, Summer 2014, Engineering Economy (Sullivan, 16th)
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Effective Tax Rate
Corporations need to know their effective tax rate, which is combination of federal and state taxes according to either fobelow.
7/22/2014 IE 343, Summer 2014, Engineering Economy (Sullivan, 16th)
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Effective Tax Rate (example)
Find the taxable income of a corporation given the informatIf you assume a state tax of 9%, what is the effective tax rate
Gross income = $5,270,000
Expenses (excluding capital) = $2,927,500
Depreciation deductions = $1,874,300
7/22/2014 IE 343, Summer 2014, Engineering Economy (Sullivan, 16th)
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Effective Tax Rate (example)
Taxable Income = $468,200
Effective tax rate = .34 + (1 .34)(.09) = 40%
7/22/2014 IE 343, Summer 2014, Engineering Economy (Sullivan, 16th)
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Gain (Loss) on Disposal of an Asset
When a depreciable asset is sold, it is rare that the market vbook value are equal.
When the sale results in a gain, it is referred to as depreciation rec
When the sale results in a loss, it is referred to ascapital gain.
7/22/2014 IE 343, Summer 2014, Engineering Economy (Sullivan, 16th)
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