Question

Silver Sun Food is evaluating the race track project. During year 1, the race track project is expected to have relevant revenue of 815,800 dollars, relevant variable costs of 347,600 dollars, and relevant depreciation of 77,200 dollars. In addition, Silver Sun Food would have one source of fixed costs associated with the race track project. Silver Sun Food just signed a deal with Indigo River Consulting to develop an advertising campaign for use in the project. The terms of the deal require Silver Sun Food to pay Indigo River Consulting either 115,000 dollars in 1 year if the project is pursued or 135,100 dollars in 1 year if the project is not pursued. Relevant net income for the race track project in year 1 is expected to be 159,137 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 :

Calculation of Tax rate :

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

= 815800 - 347600 - 77200 - 115000

= 276000

Note : Since it has been assumed project is pursued therefore given that The terms of the deal require to pay 115,000 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

= 276000 - 159137

= 116863

Tax rate = tax / profit before tax

= 116863 / 276000

= 0.4234