Consider a project with an initial investment of $50,000 and a 5 year life. Project inflows...
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 $11,200, what is the tax rate?
Homework Answers
Ans :
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
$ 11,200 = Net Income + $ 10,000
Net Income = $ 1,200
Note 3) Net Income = EBT - Taxes
$ 1,200 = $ 2,000 - Taxes (From Note 1 and 2 above)
Taxes = $ 800
Tax rate = Taxes / EBT (From Note 1 and 3)
= $ 800 / $ 2,000
= 40 %
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