Question

Question 3)

Violet Sky Food is evaluating the climbing wall project. During year 1, the climbing wall project is expected to have relevant revenue of 676,800 dollars, relevant variable costs of 381,800 dollars, and relevant depreciation of 94,100 dollars. In addition, Violet Sky Food would have one source of fixed costs associated with the climbing wall project. Violet Sky Food just signed a deal with Green Forest Consulting to develop an advertising campaign for use in the project. The terms of the deal require Violet Sky Food to pay Green Forest Consulting either 110,000 dollars in 1 year if the project is pursued or 154,900 dollars in 1 year if the project is not pursued. Relevant net income for the climbing wall project in year 1 is expected to be 203,031 dollars. 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

From the question we have all the values required

TO FIND :-What is the tax rate expected to be in year 1?

Now we have

revenue =821500 $

less variable cost = 381800$

less revalent cost = 94100$

==>substracting= 345600$

if the project is purchased then we deduct 1,10,000

therefore ,

==>345600-110000

=235600

from the question we have net income = 203031

the tax charged = 235600-203031

= 32569$

the tax rate = 32569/235600 =0.1382

as the project is not purchased so deducting 154900$

therefore ==>345600$ -154900

=190700$

from the above question we have net income = 203031

tax charged = 190700$- 203031$

=-12331$

now finding the tax rate= -12331/190700$

= 0.064

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