1 / 23

Chapter 11 - Income Taxes Click here for Streaming Audio To Accompany Presentation (optional)

Chapter 11 - Income Taxes Click here for Streaming Audio To Accompany Presentation (optional). EGR 403 Capital Allocation Theory Dr. Phillip R. Rosenkrantz Industrial & Manufacturing Engineering Department Cal Poly Pomona. EGR 403 - The Big Picture. Framework: Accounting & Breakeven Analysis

Download Presentation

Chapter 11 - Income Taxes Click here for Streaming Audio To Accompany Presentation (optional)

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript


  1. Chapter 11 - Income TaxesClick here for Streaming Audio To Accompany Presentation (optional) EGR 403 Capital Allocation Theory Dr. Phillip R. Rosenkrantz Industrial & Manufacturing Engineering Department Cal Poly Pomona

  2. EGR 403 - The Big Picture • Framework:Accounting& Breakeven Analysis • “Time-value of money” concepts - Ch. 3, 4 • Analysis methods • Ch. 5 - Present Worth • Ch. 6 - Annual Worth • Ch. 7,7A,8 - Rate of Return (incremental analysis) • Ch. 9 - Benefit Cost Ratio & other methods • Refining the analysis • Ch. 10, 11 - Depreciation & Taxes • Ch. 12 - Replacement Analysis EGR 403 - Cal Poly Pomona - SA14

  3. Income Taxes • Taxes have an impact on cash flow and affect the decisions management makes concerning investments. • Integrating tax considerations into economic analysis requires a thorough understanding of two issues. • How the taxes are imposed. • How they affect the economic analysis techniques. EGR 403 - Cal Poly Pomona - SA14

  4. A Partner(s) in the Business • 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 item. • Collected by • Federal • State • County • City For simplification the text focuses on either Federal 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 in the manner in which they are administered. EGR 403 - Cal Poly Pomona - SA14

  5. General Process • Understand the tax laws affecting the project of interest. • Estimate the cash flows without considering the effect of taxes. • Adjust the cash flow based on the effects of depreciation and income taxes. • Determine the after-tax measure of interest (PW, IRR, payback, etc.). EGR 403 - Cal Poly Pomona - SA14

  6. Calculation of Taxable Income • Tax laws can be very complex leading to very complex calculations. • A tax is just another disbursement for services rendered. EGR 403 - Cal Poly Pomona - SA14

  7. Classification ofBusiness Expenditures • Capital expenses. • Expenditures for depreciable assets. • Generally those items having a life in excess of one year. • Expenditures for non-depreciable assets. • Generally land, as land has no finite life. • Operating expenses. • Materials, labor, overhead, rents, leases, equipment having a life of less than one year. EGR 403 - Cal Poly Pomona - SA14

  8. Taxable Income of Business Firms • Taxable income = gross income - operating expenses - depreciation EGR 403 - Cal Poly Pomona - SA14

  9. Income Tax Rates • Rates change as the taxing authority requires more or less income. • Income tax rates vary, based on the taxable income of the business. A small highly profitable business might pay more income tax than a large unprofitable business. • US corporate income tax rates are found in internal revenue service form 1120. EGR 403 - Cal Poly Pomona - SA14

  10. EGR 403 - Cal Poly Pomona - SA14

  11. EGR 403 - Cal Poly Pomona - SA14

  12. EGR 403 - Cal Poly Pomona - SA14

  13. Example of How to Use Table • Corporate Before Tax Profit: $15,000,000 • Federal Tax (from tax rate table): = $3,400,000 + 0.35 ($15,000,000 - $10,000,000) = $3,400,000 + $1,750,000 = $5, 150,000 EGR 403 - Cal Poly Pomona - SA14

  14. When you sell a capital asset for more than the book value, it is treated as a profit or a gain and taxes are due EGR 403 - Cal Poly Pomona - SA14

  15. Economic Analysis Taking Income Taxes Into Account Principle elements in the after-tax analysis: • Before-tax cash flow • Investment • Benefits- costs • Depreciation • Taxable income (BTCF - depreciation) • Income taxes (Taxable income x incremental tax rate) • After tax cash flow (BTCF - income taxes) • IRR EGR 403 - Cal Poly Pomona - SA14

  16. EGR 403 - Cal Poly Pomona - SA14

  17. EGR 403 - Cal Poly Pomona - SA14

  18. EGR 403 - Cal Poly Pomona - SA14

  19. EGR 403 - Cal Poly Pomona - SA14

  20. Figuring Personal Income Taxes Gross Income (wages, tips, interest, dividends) Less: Adjustments (tax deferred investments: 401k, IRA) = adjusted gross income Less: exemptions (2750/dependent, includes you) Less: deductions - choose the most favorable of: Standard deduction: $4300 if single or $7200 if married (1999) [Note: $4700 single or $7850 (2002)], or Itemized deductions (donations, some taxes, interest on your home, major medical expenses and losses) = Taxable income Use tables to determine taxes owed on taxable income. EGR 403 - Cal Poly Pomona - SA14

  21. Example 1 - Single Student • Gross Income: $8000 • Adjusted Gross Income: $8000 • Deduction for one exemption: - $2750 • Standard deduction: - $4300 (1999 tax year) • Taxable income = $950 • Taxes owed = 0.15 * $950 = $142.50 EGR 403 - Cal Poly Pomona - SA14

  22. Example 2 -Young Single Engineer • Salary: $50,000 • Tax Deferred Investment into 401k: -$5000 • Adjusted Gross Income = $45,000 • One exemption: - $2750 • Standard deduction: - $4300 (1999 tax year) • Taxable Income = $37,950 • Taxes: $3863.50 + 0.28 ($37,950 - $25750) = $3863.50 + $3416 = $7279.50 EGR 403 - Cal Poly Pomona - SA14

  23. Young Single Engineer Buys a Condo • Cost: $220,000 with down payment of $20,000 • Loan: $200,000, 30 years, 6% nominal • Monthly Payments: $1199.10 (fixed!) • Approximate first year interest: $12,000 • Tax savings from $12,000 itemized deduction: 0.28 * $12,000 = $3360 • Property taxes (approx. 2% of value) are also deductable EGR 403 - Cal Poly Pomona - SA14

More Related