If the Canadian government decide to impose a sales tax of $ 1 on every gallon, this excess burden taxation of taxation will have tremendous impacts on the viability of the project. However, the government will raise an estimated revenue of $ 5 million all things being equal at the equilibrium point E1. By levying additional tax of $1 dollar on every gallon of product demanded, the new price shifts to $5 per gallon, this as well affects the equilibrium quantity.
At the new equilibrium point E2, the equilibrium quantity shifts inward to 4,000,000 barrels. There is a deadweight loss of $1 trillion which the market cannot account for as shown in the triangle depicted on the graph.
What effect does the excess tax burden have on the demand
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It is necessary to discount a project at a reasonable rate, because, the money we have at hand today will less valuable than the money in future. Why is the so, the value of money today will be less compared to what the same money value can buy in the future because money value also fluctuates, and the value of money is affected by economic situations such as inflation, depression, boom and bust circles, devaluation among other things.
This is equally true that money is subject to depreciation, despite its function as a storability of value and as standard for deferred payment in the future. The same goes for the cost-benefit and the impact a fall in value of money will have on the profitability and viability of a project on the long run. Even if the estimated earnings from a project was realized in terms of money, the viability of the project will depend on the net present value of the money earned on the short run compared to its value on the long run when the project wounded up in the future.
Discounting a project at a reasonable rate, takes charge of the possible depreciation of the project value in the future. Estimated returns on a project can dwindle for so many reasons such as market fluctuations, price changes, technological innovations, depreciation in the value of money. Even the fixed assets of production are subject to the law of diminishing returns. A pipeline value can be fixed but that value depreciates over time due to ageing, wear
The relatively well posed project with promises of great future pay offs must be examined closely nevertheless to determine its true profitability. As such, the Super Project’s NPV must be calculated, however before we proceed we must acknowledge the relevant cash flows. The project incurred an expense of testing the market. This expense, however, must not be included in our cash flow analysis because it can be considered a sunk cost. This expense is required for ‘taking a temperature’ of the market and will not be recovered. Other sources of cash flow include:
The present value of an outlay in perpetuity for a particular project can be calculated as follows:
So when demand increases and a supply doesn’t change, a shift in price will happen. This shift will move to the right causing a new Equilibrium.
b) What effect will an increase in the price of leather (a production input) have on the equilibrium price and quantity of footballs assuming all other things remain constant? Explain your answer with the help of a diagram.
1. Discount rate: The analysis assumes that the discount rate is the same for the complete throughput time of the project. This can be countered by using different discount rates for different years, in case required.
The returns of a project were found by discounting the appropriate cash flows against the appropriate hurdle rates. Without knowing the cost of capital, Marriott would not be able to determine hurdle rates that would help Marriott’s growth. Also, knowing the
The use of an accounting rate of return also underscores a project 's true future profitability because returns are calculated from accounting statements that list items at book or historical values and are, thus, backward-looking. According to the ARR, cash flows are positive due to the way the return has been tabulated with regard to returns on funds employed. The Payback Period technique also reflects that the project is positive and that initial expenses will be retrieved in approximately 7 years. However, the Payback method treats all cash flows as if they are received in the same period, i.e. cash flows in period 2 are treated the same as cash flows received in period 8. Clearly, it ignores the time value of money and is not the best method employed. Conversely, the IRR and NPV methods reflect that The Super Project is unattractive. IRR calculated is less then the 10% cost of capital (tax tabulated was 48%). NPV calculations were also negative. We accept the NPV method as the optimal capital budgeting technique and use its outcome to provide the overall evidence for our final decision on The Super Project. In this case IRR provided the same rejection result; therefore, it too proved its usefulness. Despite that, IRR is not the most favorable method because it can provide false results in the case where multiple negative
In fully investigating all of our calculations we are fully invested in using the Net Present Value figures we calculated as a means of ranking the eight projects. In doing so we found reasons in which why the Net Present Value was our benchmark for ranking the projects and why we did not use the Payback Method. The Payback Method ignores the time value of money, requires and arbitrary cutoff point, ignores cash flows beyond the cutoff date, and is biased against long-term projects, such as research and development and new projects. When comparing the Average Accounting Return Method to the Net Present Value method we found that the Average Accounting Return Method is a worse option than using the Payback Method. The Average Accounting Return Method is not a true rate of return and the time value of money is ignored, it uses an arbitrary benchmark cutoff rate, and is based on accounting net income and book values, not cash flows and market values. Plain and simply put, the Net Present Value method is the best criterion to use when ranking these eight
The discount rate is a means of calculating a value now of benefits that occur in the future. The discount rate recognizes the time value of money. A four percent real discount rate is used in the calculations. However, the high-speed train project would be economically feasible even under the higher discount rates used by some public agencies and economists. The Internal Rate of Return (IRR) is an evaluation measure that is
2012). Using the Figure 1, this process can be shown as follows: the subsidy enables greater production, shifting the supply line from ‘Supply’ to ‘Supply + Subsidy’. The new market equilibrium is at (P1, Q1), a greater quantity and lower price than the old equilibrium (P0, Q0). However, to supply at the new equilibrium quantity Q1, producers need the higher price P2, reflecting the increasing marginal cost of production. The government pays the difference (P2-P1) per unit of fuel, thus making total government expenditure equal to areas [B+C+D+E+F].
5. The project is assumed to end in year 4. Do you think that this is realistic? Can you estimate the value of the project’s operating cash flows beyond year 4? State any assumptions you made.
Pertaining to the diagram above, previous to government intervention, the energy drinks market was allocated purely by the forces of demand and supply1 with market equilibrium at PE (original price) and QE (original quantity). After a tax of €1 per liter was imposed, the equilibrium quantity of energy drinks produced and consumed decreased to Qtax, as the supply curve shifted upwards to Stax . Furthermore, the price paid by consumers increased to Pc from PE and price received by the energy drinks companies decreased to Pp from PE. In addition, consumer expenditure on energy drinks decreased as well. Due to indirect tax, this changed from (d+e+f+g+h) to (b+d+f+g) since consumers are purchasing less of the good as the price increased. The company’s revenue also decreased significantly from (d+e+f+g+h) to (f+g), as the quantity of output decreased. However, the government received tax revenue of (b+d), increasing its budget. Indirect tax on energy drinks ultimately results in underallocation of resources. Too little of
The application of the Goods and Services Tax was rationalized as a way to coalesce all the individual and indirect taxes that are applied for various goods under one taxation regime (Roy, 2016). The objectives cited in the move to introduce the new tax regime was to increase the tax base of the government, to remedy the cascading of taxes, to improve the compliance in the payment of taxes and to eliminate the distortions in the economy that result from the difference in the taxes levied from one state to another (Roy, 2016). In the backdrop of these objectives and the modus operandi of the new tax regime, different players in the industry have felt that it will be counterproductive in certain segments of the Indian economy.
The following paper analyzes a project from financial perspectives using the capital budgeting techniques like Net Present Value (NPV) and Internal Rate of Return (IRR).
Project appraisal techniques are used to evaluate possible investment opportunities and to determine which of these opportunities will generate the best return to the firm’s shareholders. Therefore, it is vital for the firm if they wish to continue receiving funds from shareholders to employ the best techniques available when analysing which investment opportunities will give the best return. There are two types of project appraisal techniques: non-discounted cash flows and discounted cash flows. The Net Present Value and internal rate of return, examples of discounted cash flows, are in use in many large corporations and regarded as more effective than the traditional techniques of payback and accounting rate of return. In this paper, I