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 = (1 – 0.08) = (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. R k = revenues (and savings) from the project during period k E k = cash outflows during k for deductible expenses d k = sum of all noncash, or book, costs during k, such as depreciation t = effective income tax rate on ordinary income T k = income tax consequence during year k ATCF k =ATCF from the project during year k

Taxable income = The income tax =

Federal tax rate = 34% t = (1 – 0.06) = (38%)

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