Consider a project with an initial investment of $50,000 and a 5 year life. Project inflows are $25,000 each year and pr...

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Consider a project with an initial investment of $50,000 and a 5 year life. Project inflows are $25,000 each year and pr...

Consider a project with an initial investment of $50,000 and a 5 year life. Project inflows are $25,000 each year and project outflows are $13,000 each year. Depreciation is calculated on a straight line method. If the cash flow in Year 1 is $11,400, what is the tax rate?

		25%
		45%
		20%
		40%
		30%
		35%

business finance

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Answer 1

Answer #1

Ans : Option E , 30%

Note 1) Earnings before tax (EBT) = Project Inflow - Project outflow - depreciation.

= $ 25,000 - $ 13,000 - ($ 50,000/5)

= $ 12,000 - $ 10,000

EBT = $ 2,000

Note 2) Cash flows = Net Income + Depreciation

$ 11,400 = Net Income + $ 10,000

Net Income = $ 1,400

Note 3) Net Income = EBT - Taxes

$ 1,400 = $ 2,000 - Taxes (From Note 1 and 2 above)

Taxes = $ 600

Tax rate = Taxes / EBT (From Note 1 and 3)

= $ 600 / $ 2,000

= 30 %

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Answer 2

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