Question

Middlefield Motors is evaluating project A, which would require the purchase of a piece of equipment for 373,000 dollars. During year 1, project A is expected to have relevant revenue of 141,000 dollars, relevant costs of 63,000 dollars, and some depreciation. Middlefield Motors would need to borrow 373,000 dollars for the equipment and would need to make an interest payment of 37,300 dollars to the bank in year 1. Relevant net income for project A in year 1 is expected to be 24,000 dollars and operating cash flows for project A in year 1 are expected to be 68,000 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

Please refer to below spreadsheet for calculation and answer. Cell reference also provided.

Year-1 Operationg Cash Flow Net Income Interest Depreciation $68,000.00 $24,000.00 $37,300.00 $6,700.00 Revenue Costs Depreciation EBIT Interest EBT Tax Net Income $141,000.00 $63,000.00 $6,700.00 $71,300.00 $37,300.00 $34,000.00 $10,000.00 $24,000.00 Tax rate 0.2941

Cell reference -

B Year-1 Operationg Cash Flow Net Income Interest Depreciation 68000 24000 37300 EC3-C4-C5 10 11 12 Revenue Costs Depreciation EBIT Interest EBT Tax Net Income 141000 63000 =C6 =C8-C9-C10 37300 =C11-C12 =C13-C15 =C4 Tax rate =C14/C13

Hope this will help, please do comment if you need any further explanation. Your feedback would be highly appreciated.