Answer:
Chevron Phillips (CP)
a. The gross income or annual savings is:
= $804,846.
b. The income tax for the 1st year assuming a marginal tax rate of 40% is:
= $131,600.
c. The after-tax cash flow for the 1st year is:
= $559,400.
Explanation:
a) Data and Calculations;
Cost of new laboratory equipment = $1,770,000
Borrowed capital = $849,600 ($1,770,000 * 48%)
Borrowing rate = 13.4%
Borrowing interest expense for the first year = $113,846
Depreciation = $362,000
Taxable income = $329,000
Gross savings = $X
$X = $804,846 ($113,846 + $362,000 + $329,000)
Income tax for the 1st year:
Marginal tax rate = 40%
Taxable income = $329,000
= $131,600 ($329,000 * 40%)
After-tax Cash Flows for the 1st year:
Gross savings = $804,846
Interest expense 113,846
Depreciation 362,000
Taxable income $329,000
Income tax 131,600
Net income $197,400
Cash Flows:
Net income $197,400
Depreciation 362,000
After-tax cash flow $559,400
