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Session 25Income Taxes

7/22/2014 IE 343, Summer 2014, Engineering Economy (Sullivan, 16th)

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Types of Taxes

Income taxes are assessed as a function of gross revenues mallowable expenses.

Property taxes are assessed as a function of the value of proowned.

Sales taxes are assessed on the basis of purchase of goods o

Excise taxes are federal taxes assessed as a function of the scertain goods or services often considered nonnecessities.


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Income Taxes

Up to this point, we have not considered income taxes in oudiscussion of engineering economy.

We will now observe how income taxes affect a projects estcash flows.

Income taxes resulting from the profitable operation of a firm are account in evaluation engineering projects.


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After-tax MARR

Taking taxes into account changes our expectations of returprojects, so our MARR (after-tax) is lower.

Going forward, we will primarily use and be given after-tax Mvalues.


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Taxable Income

Depreciation is not a cash flow, but it affects a corporationsincome, and therefore the taxes a corporation pays.

Taxable Income = gross income

all expenses except capital investments depreciation deductions


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Taxable Income (example)


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Taxable Income (example)


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Federal vs. State Tax


Federal taxes are calculated using a set of income brackets, applying a different tax rate on the marginal value of income

State taxes vary widely, but usually are in the range of 6 12

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Federal Tax Rates


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Income Taxes (example)


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Income Taxes (example)


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Effective Tax Rate

Corporations need to know their effective tax rate, which is combination of federal and state taxes according to either fobelow.


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Effective Tax Rate (example)

Find the taxable income of a corporation given the informatIf you assume a state tax of 9%, what is the effective tax rate

Gross income = $5,270,000

Expenses (excluding capital) = $2,927,500

Depreciation deductions = $1,874,300


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Effective Tax Rate (example)

Taxable Income = $468,200

Effective tax rate = .34 + (1 .34)(.09) = 40%


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Gain (Loss) on Disposal of an Asset

When a depreciable asset is sold, it is rare that the market vbook value are equal.

When the sale results in a gain, it is referred to as depreciation rec

When the sale results in a loss, it is referred to ascapital gain.


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Su14 IE 343 Session 25

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