Question

Platinum Water Industrial is evaluating the hair salon project. During year 1, the hair salon project is expected to have relevant revenue of 684,600 dollars, relevant variable costs of 321,600 dollars, and relevant depreciation of 71,500 dollars. In addition, Platinum Water Industrial would have one source of fixed costs associated with the hair salon project. Platinum Water Industrial just signed a deal with Blue Eagle Marketing to develop an advertising campaign for use in the project. The terms of the deal require Platinum Water Industrial to pay Blue Eagle Marketing either 108,200 dollars in 1 year if the project is pursued or 154,100 dollars in 1 year if the project is not pursued. Relevant net income for the hair salon project in year 1 is expected to be 165,663 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

Answer : Tax rate is 0.0962

Calculation of Tax rate :

Profit Before Tax = Revenue - Cost - Depreciation - Fixed Cost

= 684,600 - 321,600 - 71,500 - 108,200

= 183,300

Note : Since it has been assumed project is pursued therefore given that The terms of the deal require Platinum Water Industrial to pay Blue Eagle Marketing108,200 dollars in 1 year if the project is pursued which is taken as fixed cost in this case.

Tax = Profit Before Tax - Profit After tax

= 183300 - 165,663

= 17637

Tax rate = tax / profit before tax

= 17637 / 183300

= 0.0962