Question

Middlefield Motors is evaluating project A, which would require the purchase of a piece of equipment for 395,000 dollars. During year 1, project A is expected to have relevant revenue of 143,000 dollars, relevant costs of 57,000 dollars, and some depreciation. Middlefield Motors would need to borrow 395,000 dollars for the equipment and would need to make an interest payment of 31,600 dollars to the bank in year 1. Relevant net income for project A in year 1 is expected to be 39,000 dollars and operating cash flows for project A in year 1 are expected to be 80,000 dollars. Straight-line depreciation would be used. What is the tax rate expected to be in year 1? Answer as a rate in decimal format so that 12.34% would be entered as .1234 and 0.98% would be entered as .0098.

Answer 1

Answer:

First calculate depreciation

Operating cash flow = Net profit + Depreciation

=68000 = 33000+ Depreciation

Depreciation = 68000-33000

=35000$

Now let's calculate EBT

EBT = Revenue - cost - depreciation

= 146000-74000-35000

=37000$

Now , EBIT - Tax = Net Income

=37000 - Tax = 33000

Thus Tax = 4000

Tax rate = Tax amount/EBT

=4000/37000

=0.1081

i.e 10.81%

Explanation: