Question

Isabel, a calendar-year taxpayer, uses the cash method of accounting for her sole proprietorship. In late December she received a $43,000 bill from her accountant for consulting services related to her small business. Isabel can pay the $43,000 bill anytime before January 30 of next year without penalty. Assume her marginal tax rate is 37 percent this year and next year, and that she can earn an after-tax rate of return of 8 percent on her investments.
a. What is the after-tax cost if Isabel pays the $43,000 bill in December?

Answer 1

Answer:

Tax rate (T) = 37% = 0.37

After-tax cost = Cost (1 - T)

After-tax cost = $43,000 (1 - 0.37)

After-tax cost = $27,090

Explanation:

After-tax cost equals before tax cost multiplied by 1 - tax rate. Before-tax cost is $43,000 and when this cost is subject to tax, we will obtain the after-tax cost.

Answer 2

Answer:

the after-tax cost of debt is: 27,090

Explanation:

assuming the entire among of the consulting services is tax deductible

we can determinate the after-tax cost as:

expense x (1 - tax rate) =

 43,000 x    (1 - 0.37)    = 27,090

the rate of return of a potential investment is not relevant for this purpose as is paying right away and not giving time to invest in a project to pay the amount next year.