# Module13 - Decision-Making Preliminaries Depreciation and Taxes Part I Key Concepts Last Module Cash Flow Estimation and Information Gathering This

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Decision-Making Preliminaries Depreciation and Taxes Part I

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Key Concepts Last Module: Cash Flow Estimation and Information Gathering This Module: Depreciation and Taxes Taxes can have a significant influence on decisions and must be incorporated into the analysis.
Economic Decision Process 1 Problem (need or opportunity) Recognition and Definition 2 Generation of Solution Alternatives 3 Development of Feasible Solution Alternative 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

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Step 3 (b) : After-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
Income Taxes Revenue - Expense = Income Taxes Paid = (Income)(Tax Rate) Expenses actually reduce our taxable income!

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What is the tax rate? Taxes based on amount of profit (income): Taxable Income Tax Rate \$0 to \$50K 15% \$50K to \$75K 25% \$75K to \$100K 34% \$100K to \$335K 39% \$335K to \$10M 34%
Example Tesla, a Silicon Valley based maker of electric cars, turned its first profit in the month of July 2009 after delivering 109 of its cars (base price \$109,000). Assume they continue and make \$2 million in profit for Source: Salkaver, A., “Tesla Motors turns a surprise profit,” Daily Finance , August 11, 2009.

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Solution Calculate in steps: \$50,000 x 0.15 = \$7,500
Solution Calculate in steps: \$50,000 x 0.15 = \$7,500 \$25,000 x 0.25 = \$6,250

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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
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

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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 \$1,665,000 x 0.34 = \$566,100
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 \$1,665,000 x 0.34 = \$566,100 Total = \$680,000

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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 \$1,665,000 x 0.34 = \$566,100 Total = \$680,000 Note: \$680,000/\$2M = 34%
Example Continue the previous example but assume they go on to make \$20 million!

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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 \$9.665M x 0.34 = \$3,286,100 \$5M x 0.35 = \$1,750,000 \$3.333M x 0.38 = \$1,266,666 \$1.667M x 0.35 = \$583,334
What is the tax rate? You pay taxes based on amount of profit:

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## This note was uploaded on 01/11/2012 for the course EIN 4354 taught by Professor Tufecki during the Fall '08 term at University of Florida.

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Module13 - Decision-Making Preliminaries Depreciation and Taxes Part I Key Concepts Last Module Cash Flow Estimation and Information Gathering This

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