Ch.3: Taxes as Transaction Costs

Net Cash Flow

The difference between cash received and cash disbursed.

Time Value of Money (TVM)

A dollar available today is worth more than a dollar available tomorrow because the current dollar can be invested to start earning interest immediately.

Discount Rate

The rate of interest used to calculate the present value of future cash flows.

Net Present Value (NPV)

The sum of the present values of all cash inflows and outflows relating to a transaction.

Annuity

A cash flow consisting of a constant dollar amount for a specific number of time periods.

Tax Cost

An increase in tax liability for any period resulting from a transaction.

Tax Savings

A decrease in tax liability for any period resulting from a transaction.

Deduction

An offset or subtraction in the calculation of taxable income.

Private Letter Ruling (PLR)

The IRS’s written response to a taxpayer’s inquiry as to how the tax law applies to a proposed transaction.

Market

A forum for commercial interaction between two or more parties for the purpose of exchanging goods or services.

Private Market

A market in which the parties deal directly with each other and can customize the terms of their agreement to meet their respective objectives.

Arm’s- Length Transaction

A transaction occurring between unrelated parties who are dealing in their own self-interest

Public Market

A market in which the parties deal indirectly through an intermediary such as a broker or a financial institution.

Related Party Transactions

A transaction between parties who share a common economic interest or objective and who may not be dealing at arm’s length.