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Chapter 15&16 - White Version - Spring 2010

# Chapter 15&16 - White Version - Spring 2010 - CHAPTER...

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CHAPTER 15 Taxes CHAPTER 16 Depreciation

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Homework Chapters 15-16 DUE DUE : 3/06/10 Chapter 15 Chapter 15 Problems - A2, B2, C1 CHAPTER 16 CHAPTER 16 Depreciation Problems Problems - A2, A3, B4, B5
Taxes and Depreciation Taxes and Depreciation Taxes reduce positive cash flow (you pay them therefore you have less money) Taxes are treated as an expense of doing business Often need Depreciation to correctly calculate taxes The Depreciation amount is a tax deduction therefore it reduces the total tax you pay – which increased your cash flow (by paying less in taxes)

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Basic Tax Calculations Personal Experience You make money, you pay taxes Since you are paying out taxes, the money you have is decreased Tax Brackets Personal Tax Brackets Corporate Tax Brackets
15.2 Example 15.2 GIVEN: Invest \$10,000 Expected Return = \$1,000 per year n = 5 Personal Tax Bracket = 28% QUESTION What is the before tax and after tax rate of return? Draw Cash Flow Diagrams Calculate ROR

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15.2 P = \$10,000 A = \$1,000 per year n = 5 Tax Bracket = 28% NOT TAXED TAXED \$10,000 A = \$1,000 \$10,000 5 \$10,000 10,000 A = \$1,000 A = \$280 5
Calculate Rates of Return No Tax: No Tax: ROR = -10,000 + 1000(P/A,i,5) + 10,000(P/F,i,5) ROR = 10% Taxed: Taxed: ROR = -10,000 + 1,000 (P/A, i, 5) - 280 (P/A,i,5) + 10,000(P/F,i,5) = -10,000 + 720 (P/A, i, 5) + 10,000(P/F,i,5) ROR = 7.2%

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Money earned above the initial investment Capital gains income = Ordinary income (Post 1986) For example You purchase a house for \$100,000 10 years later, you sell the house for \$120,000 You have Capital Gains of \$20,000 and are taxed on that amount Capital Gains
15.3 Example 15.3 Capital Gains (Profit) Capital gains income = Ordinary income (Post 1986) Purchase stock = \$ 10,000 Sell Stock = \$ 12,000 Capital Gains = \$ 2,000 Tax Bracket = 27% You are not taxed on the original (principal) \$10,000 - only on the \$2,000 you made Therefore the taxes paid are (\$2,000)(.27) = \$540 you keep \$1,460

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15.3 Example 15.3 All annual net incomes are taxable at 28%. The client retains \$0.72 out of every \$1 income after taxes \$10,000 \$1,000 \$12,000 4 4,000 3,000 2,000 2 1 3 NPWafter taxes = -\$10,000 + \$1,000 (\$1-\$0.28)(P/G, i, 5)(F/P, i, 1) + \$12,000 (\$1 - \$0.28) (P/F, i, 4) After tax ROR = 19.2%
Types of Taxes Property Tax Measured in Mil’s 1000 mils = \$1.00 Real Property Land, Buildings Personal Property Tangible: Car, equipment Intangible: Stocks, Bonds Sales Tax One of the largest sources of revenue for the government

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Types of Taxes Value Added Tax Increasing the value of an item, you pay taxes on the added value Example 15.4 Purchase PVC pellets = \$100,000 Manufacture pipe = \$125,000 Sell pipe = \$250,000 Profit = \$ 25,000 If VAT = 10% you pay \$2,500 in taxes 15.4
Types of Taxes Income Tax Federal State City

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Effects of Taxes on investment decisions Assume you have a business The business is in a 34% tax bracket For every \$1.00 the company makes, the government takes \$0.34, leaving \$0.66 If you had stock options for the company and dividends were paid based on the company profit, you only get \$0.66 for every \$1.00 profit Assume you personally are in a 28% tax bracket Meaning the government takes (.28)(\$0.66) = \$0.18 Your portion of the \$1.00 profit is \$0.48 For every \$1.00 the company makes, the government gets \$0.52, you get \$0.48
Investment Tax Credit (ITC) aries depending on economy

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