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.
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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
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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%
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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
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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
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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
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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
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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
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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%
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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
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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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