Upload
mrohaizam
View
227
Download
0
Embed Size (px)
Citation preview
8/2/2019 6.2 Income Taxes
1/12
8/2/2019 6.2 Income Taxes
2/12
Taxes have an effect on cash flow and effectthe investment decisions managers make
Integrating tax considerations into
economic analysis requires a thoroughunderstanding of two issues How the taxes are imposed
How taxes affect the economic analysis
techniques
8/2/2019 6.2 Income Taxes
3/12
Type of tax Income tax based on earnings Property tax based on property value Sales tax based on purchase price Use tax based on type of use of an items
Collected by Federal
Stare Country City
For simplicity, the text focuses on eitherfederal income taxes or bundles the tax into
a rate that reflects all taxing entities.This is done as the taxes at the state or
local level vary widely.
8/2/2019 6.2 Income Taxes
4/12
Calculation of After-Tax Figure of Merit(General Process) Understand the tax laws affecting the project of
interest Estimate the cash flows without considering the
effect of taxes Adjust the cash flows based on the effects of
depreciation and income taxes Determine the after-tax measure of merit (PW,
IRR, payback, etc.) Calculation of Taxable Income
Tax laws can be very complex, which can leadto very complex calculations
A tax is just another disbursement for services
rendered
8/2/2019 6.2 Income Taxes
5/12
Taxable income
= gross income all expenditures
except capital expenditures depreciation and depletion charges
8/2/2019 6.2 Income Taxes
6/12
Capital Expenditures Expenditures for depreciable life
Generally those items having a life in excess of
one year Expenditures for non-depreciable life
Generally land, as land has no finite life
Operating Expenditures Materials, labor, overhead, rents, leases,
equipment having a life of less than oneyear
8/2/2019 6.2 Income Taxes
7/12
During a 3-year period, a firm had thefollowing results (in millions of dollars):
Compute the taxable income for each of thethree years
Year 1 Year 2 Year 3
Gross income form sales $200 $200 $200
Purchase of special tooling(useful life: 3 years)
-60 0 0
All other expenditures -140 -140 -140
Cash results for the year $0 $0 $0
8/2/2019 6.2 Income Taxes
8/12
The French Chemical Corporation was formed toproduce household bleach. The firm boughtland for $200,000, hand a $900,000 factorybuilding erected, and installed $650,000 worthof chemical and packaging equipment. The pant
was completed and operations begun on April 1.the gross income for the calendar year was$450,000. Supplies and all operating expenses,excluding the capital expenditures, were$100,000. the firm will use modified accelerated
cost recovery system (MACRS) application What was the first-year depreciation charge? What is the first-year taxable income?
8/2/2019 6.2 Income Taxes
9/12
Rate change as the taxing authority requiresmore or less income
Income tax rates vary, based on the taxable
income of the business. A small, highlyprofitable business might pay more incometax than a large, unprofitable business.
8/2/2019 6.2 Income Taxes
10/12
Principal elements in the after-taxanalysis: Before-tax cash flow
Investment Benefits Cost
Depreciation
Taxable income (BTCF depreciation)
Income taxes (Taxable income xincremental tax rate)
After tax cash flow (BTCF income taxes)
IRR
8/2/2019 6.2 Income Taxes
11/12
A medium-sized profitable corporation isconsidering the purchase of a $3000 usedpickup truck for use by the shipping andreceiving department. During the trucks 5-year useful life, it is estimated the firm will
save $800 per year after all the costs ofowing and operating the truck have beenpaid. Truck salvage value is estimated at$750
What is the before-tax rate of returnWhat is the aster-tax rate of return on this capitalexpenditure? Assume straight-line depreciation.
8/2/2019 6.2 Income Taxes
12/12
An analysis of a firms sales activities indicates
that a number of profitable sales are lost eachyear because the firm cannot deliver same of itsproducts quickly enough. By investing anadditional $20,000 in inventory it is believed thata firm will realize $1000 more in before-taxprofits in the first year. In the second year,before-tax extra profit will be $1500. profits forsubsequent years are expected to continue toincrease on a $500-per-year gradient. Theinvestment in the additional inventory may berecovered at the end of a 4-year analysis period
simply by selling it and not replenishing theinventory. Compute:The before tax rate of returnThe after-tax rate of return assuming an incremental taxrate of 39%