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1
After
After
Tax Cash Flows
Tax Cash Flows
IE 226
IE 226
2
Economic Decision Process
Economic Decision Process
1
Problem (need or opportunity) Recognition
and Definition
2
Generation of Solution Alternatives
3
Development of Feasible Solution
Alternative Cash Flows
±
AfterTax Cash Flows
4
Economic Evaluation of Alternatives, including
cases under uncertainty and risk
5
Selection and Implementation of Best
Alternative
6
Postimplementation Analysis and Evaluation
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Step 3
Step 3
(b)
(b)
: After
After
Tax Cash Flows
Tax Cash Flows
Income Taxes  paid on profits from operations
Tax on Sale of Capital Assets  paid when
assets are sold for more than their book value
Capital Gains Taxes  paid when assets are sold
for more than their purchase price
Tax Credits  received due to loss from
operations or sales and possibly for investments
4
Income Taxes
Income Taxes
Revenue
E
x
p
e
n
s
e
=I
n
c
o
m
e
Taxes Paid = (Income)(Tax Rate)
Expenses actually reduce our taxable income!
5
What is my tax rate?
What is my tax rate?
You pay taxes based on amount of profit:
Taxable Income
Tax Rate
$0 to $50K
15%
$50K to $75K
25%
$75K to $100K
34%
$100K to $335K
39%
$335K to $10M
34%
$10M to $15M
35%
$15M to $18.3M
38%
$18.3M and up
35%
Spikes in rates are designed to give brackets “flat rates”
of 34% ($335K to $10M) and 35% (over $18.3M).
We use
“effective” rates.
6
Example
MedcomSoft Inc., a company that designs,
develops and markets software to the
healthcare industry, reported income before
taxes of $259,102 in 2004.
Federal taxes using the chart:
Calculate in steps:
$50,000 x 0.15 =
$7,500
$25,000 x 0.25 =
$6,250
$25,000 x 0.34 =
$8,500
$159,102 x 0.39 =
$62,050
Total =
$84,300
“MedcomSoft 2Q Revs $259,102,”
Dow Jones Newswires
, February 11, 2005.
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Example
Example
AutoNation Inc., the number one U.S. auto
retailer in terms of sales, reported an income
before taxes of $161.8 million in 2004.
Calculate their federal income tax rate
assuming the schedule:
Freeman, S., “AutoNation’s Earnings Surge On Sales Gains, Reduced Costs,”
The Wall Street Journal
, February 4, 2005.
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Solution
Calculate in steps:
$50,000 x 0.15 =
$7,500
$25,000 x 0.25 =
$6,250
$25,000 x 0.34 =
$8,500
$235,000 x 0.39 =
$91,650
$9.663M x 0.34 =
$3,285,420
$5M x 0.35 =
$1,750,000
$3.3M x 0.38 =
$1,254,000
$143.5M x 0.35 =
$50,225,000
Total =
$56,628,320
Rate: $56,628,320/$161.8M = 0.35……
Why?
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Effective Tax Rate
Effective Tax Rate
We generally assume that we are given an
“effective” tax rate which incorporates all
taxes
Federal, State and Local
One can calculate as follows.
Find the federal
rate (usually 34 or 35%):
Effective Tax Rate = (federal rate)(1state rate) +
state rate
This accounts for the state taxes paid being a
deductible expense for federal taxes.
10
Expenses
Expenses
Labor
Materials
Maintenance
Operating Costs
Interest
Depreciation
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Depreciation
Depreciation
Buying an asset does not constitute an
“expense” in the government’s eyes.
When you purchase an asset (depreciable), you
may “expense” it over time.
The depreciation
in a given year is the amount of expense.
Depreciation is an
expense
, but
NOT
a cash
flow.
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This note was uploaded on 01/24/2011 for the course IE 226 taught by Professor Tonkay during the Fall '09 term at Lehigh University .
 Fall '09
 TONKAY

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