Question

Problem 03-13 (Static) (LO 3-3) Company J must choose between two alternative business expenditures with the following cashflows: Expenditure 1: $80,000 cash outflow Expenditure 2: $60,000 cash outflow Required: a. Determine the marginal tax rate at which the after-tax cash flows from the two expenditures are equal assuming that Expenditure 1 is fully deductible and Expenditure 2 is nondeductible. b. Determine the marginal tax rate at which the after-tax cash flows from the two expenditures are equal assuming that Expenditure 1 is 50 percent deductible and Expenditure 2 is nondeductible. c. Determine the marginal tax rate at which the after-tax cash flows from the two expenditures are equal assuming that Expenditure 1 is fully deductible and Expenditure 2 is 50 percent deductible Complete this question by entering your answers in the tabs below. Required A Required B Required C Determine the marginal tax rate at which the after-tax cash flows from the two expenditures are equal assuming that Expenditure 1 is fully deductible and Expenditure 2 is nondeductible. Marginal tax rate % K Required Required B > < Prey 10 of 15 Score answer

Answer 1

Req.A	Let the marginal tax rate be Y
	80,000 x ( 1 - Y ) = 60,000
	80,000 - 80,000 Y = 60,000
	80,000 Y = 80,000 - 60,000
	80,000 Y = 20,000
	Y = 20,000 / 80,000
	Y = 25%
	Marginal tax rate is 25.00% .
Req.B	Let the marginal tax rate be Y
	80,000 - ( 80,000 x 50% x ( 1 - Y ) ) = 60,000
	80,000 - ( 40,000 x ( 1 - Y ) ) = 60,000
	80,000 - ( 40,000 - 40,000 Y ) = 60,000
	80,000 - 40,000 + 40,000 Y   = 60,000
	40,000 + 40,000 Y = 60,000
	40,000 Y = 60,000 - 40,000
	40,000 Y = 20,000
	Y = 20,000 / 40,000
	Y = 50%
	Marginal tax rate is 50.00% .
Req.C	Let the marginal tax rate be Y
	80,000 x ( 1 - Y ) = 60,000 - ( 60,000 x 50% x (1 - Y ) )
	80,000 - 80,000 Y = 60,000 - ( 30,000 x (1-Y) )
	80,000 - 80,000 Y = 60,000 - ( 30,000 - 30,000 Y )
	80,000 - 80,000 Y = 60,000 - 30,000 + 30,000 Y
	30,000 Y + 80,000 Y = 80,000 + 30,000 - 60,000
	110,000 Y = 50,000
	Y = 50,000 / 110,000
	Y = 45.45%
	Marginal tax rate is 45.45 % .