Question

Middlefield Motors is evaluating project A, which would require the purchase of a piece of equipment for 393,000 dollars. During year 1, project A is expected to have relevant revenue of 157,000 dollars, relevant costs of 79,000 dollars, and some depreciation. Middlefield Motors would need to borrow 393,000 dollars for the equipment and would need to make an interest payment of 23,580 dollars to the bank in year 1. Relevant net income for project A in year 1 is expected to be 17,000 dollars and operating cash flows for project A in year 1 are expected to be 73,000 dollars. Straight-line depreciation would be used. What is the tax rate expected to be in year 1

Answer 1

Answer:

0.2273

Explanation:

The computation of the tax rate expected to be in year 1 is shown below:-

Depreciation = Operating cash flow - Net income - Interest

= $73,000 - $17,000 - $23,580

= $32,420

Earning before interest and tax = Revenue - Cost - Depreciation

= $157,000 - $79,000 - $32,420 -

= $45,580

Earning before tax = Earning before interest and tax - Interest

= $45,580 - $23,580

= $22,000

Tax rate = Earning before tax - Net income

= $22,000 - $17,000

= $5,000

Tax rate = Tax ÷ EBT

= $5,000 ÷ $22,000

= 0.2273