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Class 22 - Class 22 Taxes ISE 2014 Fall 2011 Taxes When...

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Class 22 –Taxes ISE 2014 Fall 2011
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Taxes When making economic decisions, income taxes are going to have an effect on our decisions Both state and federal taxes can apply to our company Before we jump into any problems, we need to tweak our analysis framework just a bit
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Effective Tax Rate Federal tax rates can be found in your textbook on page 311 Tricky to read at first, the % is the rate for the current bracket and the number behind it is the sum of all previous brackets State tax rates obviously vary by state, and we’ll simplify the discussion of these for class purposes
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Effective Tax Rate Working with two tax rates is unwieldy, so we generally combine our tax rates into a single effective tax rate for analysis purposes We have two equivalent expressions for effective tax rate: t = State rate + Federal rate (1 – State rate) t = Federal rate + (1 – Federal Rate)(State rate)
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After Tax MARR We’ve used the MARR to define the company’s threshold for decisions It makes sense that taxes will affect our decision thresholds We still have the before-tax MARR we’ve been using all along Our options may have different tax rates, so we need a way to include this and the MARR in our analysis
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