Types of taxes.

• Income taxes are assessed as a function of gross revenues minus allowable expenses.

• Property taxes are assessed as a function of the value of property owned.

• Sales taxes are assessed on the basis of purchase of goods or services.

• Excise taxes are federal taxes assessed as a function of the sale of certain goods or services often considered non-necessities.

We will focus on income taxes.

Before Tax MARR

• If the asset is non depreciable and there are no gains or losses on disposal, tax credits, or other types of deductions involved this approximation in the equation above is exact.

• Otherwise, some degree of error is introduced, since the factors cited affect amount and timing of income tax payments

Taxable Income

taxable income = gross income -all expenses –depreciation

The Effective Corporate Income Tax Rate ( Federal tax )

Federal Tax = 113,900 + (468,200 – 335,000) × 34%

= 159,188$

Average Federal Tax rate = 159,188 / 468,200 = 34%

The Effective Income Tax Rate

t = State rate +Federal rate (1 -State rate) OR t = Federal rate +(1- Federal rate) (State rate )

Federal rate in table (7-5)

Example if State rate = 8% and the Federal rate = 35% then

t = 0.08 + 0.35 (1 – 0.08) = 0.402 (40.2%)

In this Chapter Approximately 40% will be used

Gain or Loss on the Disposal of the asset

The disposal of a depreciable asset can result in a gain or loss based on the sale price (market value) and the current book value

An asset sold for more than it’s Book value results in a capital gain, and it is generally taxed as the same as ordinary income.

A loss is a capital loss, and considered as expenses in tax calculation

After Tax Economic Analysis

Cash flows are typically determined for each year using the notation below.

Rk = revenues (and savings) from the project during period k

Ek = cash outflows during k for deductible expenses

dk = sum of all noncash, or book, costs during k, such as depreciation

t = effective income tax rate on ordinary incomeTk = income tax consequence during year k

ATCFk = ATCF from the project during year k

Taxable income =

The income tax =

Federal tax rate = 34%

t = 0.06 + 0.34 (1 – 0.06) = 0.3796 (38%)

Chapter 7 HW :

7-6, 7-8, 7-9, 7-13, 7-16, 7-21, 7-22, 7-25, 7-31, 7-42,