Ch_8_After_Tax_Cash_Flows

# Ch_8_After_Tax_Cash_Flows - After-Tax Cash Flows IE 226 1...

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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 ± After-Tax Cash Flows 4 Economic Evaluation of Alternatives, including cases under uncertainty and risk 5 Selection and Implementation of Best Alternative 6 Post-implementation Analysis and Evaluation

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3 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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7 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. 8 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?
9 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)(1-state 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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11 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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Ch_8_After_Tax_Cash_Flows - After-Tax Cash Flows IE 226 1...

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