Annual tax

FIG. 9-1 Relationship between annual costs, annual profits, and cash flows for a project. A d — annual depreciation allowance Acf — annual net cash flow after tax Ac/ = annual cash income Age = annual general expense Aqp = annual gross profit A/r = annual tax A e = annual manufacturing cost Avc/ = annual net cash income Avvp = annual net profit after taxes A/ p = annual net profit As = annual sales Apc = annual total cost (DCFRR) = discoiinted-cash-flow rate of return (NPV) = net present value. 

Annual net income (or profit) = Annual gross income — Annual taxes (III.7)... 

A storekeeper leases her store building for the following amount 1,000 per month rent, -jy of the 18,000 annual tax bill, and 3% of the gross receipts from her store. If the storekeeper takes in 75,000 in one month, what will her lease payment be ... 

Depreciation is allowed as an operating expense, and hence as part of the production cost, as far as calculation of corporation tax liability is concerned. The rates and timing of such allowance against tax can vary, but the most likely method is to count it annually against an annual tax assessment. 

The P/A ratio is known as the uniform-series present-worth factor. The annual cash flow may be discounted to present worth by multiplication by P/A. Multiplication of present value by A/P gives the amount of annual cash flow. The factors P/F, P/A and A/P for a period of 30 years at interest rates of 6, 8, 10, 12, 15 and 20% for a period of 1-30 years are given in Table 5.1. Depreciation D is an annual tax allowance for the... 

Solution. From Table 1, annual tax on gross earnings of 335,000 is... 

The new automated process costs 2 million and has an expected lifetime of five years and an estimated salvage value of 3(X),000. The annual tax shield would be ... 

Typically, the contractor carries the cost of exploration, appraisal and development, later claiming these costs form a tranche of the produced oil or gas ( cost oil ). If the cost oil allowance is insufficient to cover the annual costs (capex and opex), excess costs are usually deferred to the following year. After the deduction of royalty (if applicable) the remaining volume of production (called profit oil ) is then split between the contractor and the host government. The contractor will usually pay tax on the contractor s share of the profit oil. In diagrammatic form the split of production for a typical PSC is shown in Figure 13.11. 

Synthetic ethanol is derived from petroleum by hydration of ethylene In the United States some 700 million lb of synthetic ethanol is produced annually It is relatively inexpensive and useful for industrial applications To make it unfit for drinking it is denatured by adding any of a number of noxious materials exempting it from the high taxes most governments impose on ethanol used m beverages... 

The beer is taxed with a basic rate on the wort gravity of 1030° and an extra rate for each additional degree of gravity. For example, in 1985 about 500/L at 1030° and 1.50/L for each additional degree. The tax is based on wort production, but includes an allowance for a legitimate loss of 6%. Production has decreased from 64.6 x 10 hL in 1975 to 60.3 x 10 hL in 1988. Per capita annual consumption was 111 L in 1987. 

The most common approach to fixed cost estimation iavolves the use of a capital recovery factor to give the annual depreciation and return on capital. This factor typically is between 15 and 20% of the total capital investment. Property taxes are taken as 1—5% of the fixed capital and iasurance is assumed to be 1—2% of the fixed capital. If annual depreciation is estimated separately, it is assumed to be about 10% of the fixed capital investment. The annual iaterest expense is sometimes neglected as an expense ia preliminary studies. Some economists even beHeve that iaterest should be treated as a return on capital and not as part of the manufactufing expense. 

Proprietary Solvents and Special Industrial Solvents. Proprietary solvents and special industrial solvents are made with specially denatured alcohols according to the formulas authorized by the BATE. They can be purchased by customers without payment of tax, without posting a bond for tax, and without securing a permit from the BATE. SuppHers are required, however, to notify the BATE of the name, address, type of business, and approximate annual requirements and intended end use for any user buying in bulk. 

Annual income or expenditure particularized by tbe subscript Annual allowances against tax other than for depreciation of fixed assets Annual writing down (depreciation) of fixed assets, allowable against tax Asset-turnover ratio defined by Eq. (9-131)... 

Net annual cash income Avc/ is the annual cash income Ac , minus the annual amount of tax Aif. 

The annual amount of tax Aff included in Eq. (9-2) does not necessarily correspond to the annual cash income Ac/ in the same year. The tax payments in Eq. (9-2) should be those actually paid in that year. In the United States, companies pay about 80 percent of the tax on estimated current-year earnings in the same year. In the United Kingdom, companies do not pay tax until at least 9 months after the end of the accounting period, which, for the most part, amounts to paying tax on the previous year s earnings. When assessing projects for different countries, engineers should acquaint themselves with the tax situation in those countries. 

In modern methods of profitability assessment, cash flows are more meaningful than profits, which tend to be rather loosely defined. The net annual cash flow after tax is given by... 

The terms gross annual profit Agp and net annual profit Avp are commonly used by accountants and misused by others. Normally, both Agp and A vp are calculated before tax is deducted. Gross annual profit Agp is given by... 

In the first case, the annual taxable income is reduced by an annual depreciation charge or allowance which has the effect of reducing the annual amount or tax payable. The annual depreciation charge is merely a book transac tion and does not involve any expenditure of cash. The method of determining the annual depreciation charge must be agreed to by the appropriate tax authority. 

The principal use of a particular depreciation rate is for tax purposes. The permitted annual depreciation is subtrac ted from the annual income before the latter is taxed. The basis for depreciation in a particular case is a matter of agreement between the taxation authority and the company, in conformity with tax laws. 

In the sinking-fund method of depreciation, the effect of interest is to make the annual decrease of the book value of the equipment or plant less in the early than in the later years with consequent higher tax due in the earlier years when recovery of the capital is most important. 

It is preferable not to think of annual depreciation as a contribution to a fund to replace equipment at the end of its life but as part of the difference between the revenue and the expenditure, which difference is tax-free. 

Since different meanings are ascribed to both annual profit and invested capital in Eq. (9-25), it is important to define the terms precisely. The invested capital may refer to the original total capital investment, the depreciated investment, the average investment, the current value of the investment, or something else. The annual profit may refer to the net annual profit before tax A vp, the net annual profit after tax Awp, the annual cash income before tax Aci, or the annual cash income after tax A vcf... 

The fractional interest rate of return based on the net annual profit after tax and the original investment is... 

Net annual cash income after tax A ci = 25,500 in each of 10 years Fixed-capital cost Cpc = 120,000... 

FIG. 9-6 Effect of straight-line depreciation on rate of return for a project. Abd — annual depreciation allowance A c/ = annual net cash income after tax Awwp = annual net profit after payment of tax Cj = total capital cost. 

Example 2 Net Present Value for Different Depreciation Methods The following data descrihe a project. Revenue from annual sales and the total annual expense over a 10-year period are given in the first three columns of Table 9-5. The fixed-capital investment Cpc is 1,000,000. Plant items have a zero salvage value. Working capital C vc is 90,000, and cost of land C/ is 10,000. There are no tax allowances other than depreciation i.e., is zero. The fractional tax rate t is 0.50. 

At the end of Year 10, the working capital (C vc = 90,000) and the cost of land (Cl = 10,000) are recovered, so that the annual expenditure of capital Atc in Year 10 is — 100,000 per year. Hence, the net annual cash flow (after tax) for Year 10 must reflect this recovery. By using Eq. (9-4),... 

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