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Dr. A. Alim
Income Tax The total amount of money transferred from the enterprise to the various taxing agencies for a given tax year.
Federal corporate taxes are
normally paid at the end of every quarter and a final adjusting payment is submitted with the tax return at the end of the fiscal year. This tax is based upon the income producing power of the firm.
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2012 by McGraw-Hill, New York, N.Y All Rights Reserved
Slide Sets to accompany Blank & Tarquin, Engineering Economy, 7th Edition, 2012
Terms - continued
Operating Expenses
Taxable Income All legally recognized Calculated amount of money for a specified costs associated with time period from doing business for the tax which the tax liability year. is determined. Real cash flows. Calculated as: TI = Gross Income expenses depreciation TI = GI E D
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2012 by McGraw-Hill, New York, N.Y All Rights Reserved
Slide Sets to accompany Blank & Tarquin, Engineering Economy, 7th Edition, 2012
Terms - continued
Tax rate T A percentage or decimal equivalent of TI. For Federal corporate income tax T is represented by a series of tax rates. The applicable tax rate depends upon the total amount of TI. Taxes owed equals: Taxes = (taxable income) x (applicable rate) = (TI)(T).
Net Profit After Tax (NPAT) Amount of money remaining each year when income taxes are subtracted from taxable income. NPAT = TI {(TI)(T)} = (TI)(1-T) Effective tax rate Te combines federal and local rates: Total Tax = Federal tax + State tax State tax is deductable from taxable federal income, hence : if Tf is federal tax rate, Ts is state tax rate, and Te is total effective tax rate:
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The rates shown above constitute graduated or progressive tax rates. Each bracket rate is termed a marginal tax rate.
Slide Sets to accompany Blank & Tarquin, Engineering Economy, 7th Edition, 2012
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The rates shown above constitute graduated or progressive tax rates. Each bracket rate is termed a marginal tax rate.
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Country
USA, Argentina
Germany, France, Spain, Australia, UK. Russia, China, Canada, Hungary, UAE Serbia, Bulgaria, Montenegro
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2012 by McGraw-Hill, New York, N.Y All Rights Reserved
Slide Sets to accompany Blank & Tarquin, Engineering Economy, 7th Edition, 2012
Slide Sets to accompany Blank & Tarquin, Engineering Economy, 7th Edition, 2012
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appear in years 1 to n
year 0
year n
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Important Notes:
*) E and P are always negative values. *) S and possibly working capital (W) appear in last year as positive values *) P,S, and W appear only in CFBT and CFAT, never in TI. *) Only fixed capital is depreciated. *) In a given year, if the depreciation is larger than (GI-E), TI will be negative resulting in a negative tax, or tax credit.
Slide Sets to accompany Blank & Tarquin, Engineering Economy, 7th Edition, 2012
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Example 17.3
YEAR 0 1 2 3 4 5 6 Total GI $0 $200,000 $200,000 $200,000 $200,000 $200,000 $200,000 E P and S CFBT -$550,000 $110,000 $110,000 $110,000 $110,000 $110,000 $260,000 $260,000 d D $0 $110,000 $176,000 $105,600 $63,360 $63,360 $31,680 $550,000 TI $0 $0 -$66,000 $4,400 $46,640 $46,640 $78,320 TAXES $0 $0 -$23,100 $1,540 $16,324 $16,324 $27,412 $38,500 CFAT -$550,000 $110,000 $133,100 $108,460 $93,676 $93,676 $232,588 $221,500 $0 -$550,000 -$90,000 -$90,000 -$90,000 -$90,000 -$90,000 -$90,000 $150,000
GI - E - P + S
d x 550,000 GI - E - D
0.35xTI
CFBT-Taxes
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Note that CFAT does not equal (NPAT+ D) in year 0 and in the last year. CFAT equals (NPAT+D) only in years 1 to (n-1).
Example 17.3
Y 0 1 2 3 4 5 6 Total GI - E $0 $110,000 $110,000 $110,000 $110,000 $110,000 $110,000 P and S -$550,000 CFBT -$550,000 $110,000 $110,000 $110,000 $110,000 $110,000 $260,000 $260,000 d D $0 $110,000 $176,000 $105,600 $63,360 $63,360 $31,680 $550,000 TI $0 $0 -$66,000 $4,400 $46,640 $46,640 $78,320 TAXES $0 $0 -$23,100 $1,540 $16,324 $16,324 $27,412 $38,500 CFAT -$550,000 $110,000 $133,100 $108,460 $93,676 $93,676 $232,588 $221,500 NPAT $0 $0 -$42,900 $2,860 $30,316 $30,316 $50,908 NPAT + D $0 $110,000 $133,100 $108,460 $93,676 $93,676 $82,588
$150,000
GI - E - P + S
d x 550,000
GI - E - D
0.35xTI
CFBT-Taxes TI - Taxes
Slide Sets to accompany Blank & Tarquin, Engineering Economy, 7th Edition, 2012
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Objective Minimize the PW of future taxes paid owing to a given depreciation method
For the same salvage value, the total taxes paid are equal for all
t=1
depreciation models The PW of taxes paid is less for accelerated depreciation methods Shorter depreciation periods result in lower PW of future taxes paid over longer time periods
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Total PW
$24,500.00 $18,385.67
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50,000.00 $ $ $ 30,000.00 $20,000.00 $ $ 18,000.00 $12,000.00 $ 8,000.00 $ 2,800.00 10,800.00 $ 7,200.00 $12,800.00 $ 4,480.00 6,480.00 $ 4,320.00 $15,680.00 $ 5,488.00 3,888.00 $ 2,592.00 $17,408.00 $ 6,092.80 $ $20,000.00 $ 7,000.00
Total PW
$46,112.00
$25,860.80 $18,548.61
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$10,000.00 $10,000.00 $ 3,500.00 $16,000.00 $ 4,000.00 $ 1,400.00 $ 9,600.00 $10,400.00 $ 3,640.00 $ 5,760.00 $14,240.00 $ 4,984.00 $ 5,760.00 $14,240.00 $ 4,984.00 $ 2,880.00 $17,120.00 $ 5,992.00
Total PW
100.00
$50,000.00
$24,500.00 $18,161.96
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Cash flow analysis is important in calculating ROR Before tax and After tax
The Rate Of Return (ROR) is a general term used to measure profitability. There are several ways to define ROR, e.g.: * If we ignore time value of money, then ROR is known as Return on Invested Capital (ROI), In this case, ROR = ROI = Net Profit / Invested capital. * If we include time value of money, for a series of cash flows, the ROR is known as IRR (internal rate of return) or discounted cash flow rate of return (DCFRR)
The rate of return ROR can be calculated using the IRR function for a series of cash flows.
Rate of return (ROR) can be calculated before tax using CFBT analysis, and/or after tax using CFAT analysis. We therefore have a Before Tax ROR and an After-Tax ROR. Both may be obtained using the IRR function. An approximate relationship may also be used:
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Example:
A company has spent $50,000 for a 5-year-life machine that has a projected $20,000 annual CFBT and annual depreciation of $10,000. The company has a Te of 40%. Determine: Exact Before-Tax ROR and After-Tax ROR. Approximate Before-Tax ROR
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YEAR 0 1 2 3 4 5 ROR
Depreciation
TI
Taxes
Before-Tax ROR
After-Tax ROR
Approximate Before-Tax ROR = After-Tax ROR / ( 1 - Te) Equal 0.1803 / (1 - 0.4) = 0.3005 or 30.05%
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