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Red Royal Aviation is evaluating the laser tag center project. During year 1, the laser tag...

Red Royal Aviation is evaluating the laser tag center project. During year 1, the laser tag center project is expected to have relevant revenue of 800,700 dollars, relevant variable costs of 320,400 dollars, and relevant depreciation of 67,100 dollars. In addition, Red Royal Aviation would have one source of fixed costs associated with the laser tag center project. Red Royal Aviation just signed a deal with Indigo River Media to develop an advertising campaign for use in the project. The terms of the deal require Red Royal Aviation to pay Indigo River Media either 103,400 dollars in 1 year if the project is pursued or 132,100 dollars in 1 year if the project is not pursued. Relevant net income for the laser tag center project in year 1 is expected to be 308,048 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.

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Answer #1

Fixed Costs for River Media Aviation = $ 103,400 ( since that is the amount River Media Aviation will have to pay irrespective of whether they continue or not with the project)

Earnings Before Interest, Depreciation and Taxes = 800,700 - 320,400 - 103,400 = $ 376,900

Earnings before Interest and Taxes = $376,900 - $67,100 = $309,800

Relevant Net Income after taxes = $308,048

Taxes = $309,800- $308,048 = $1,752

Tax Rate = Taxes/EBIT *100 % = 1752/308048*100 = 0.57%

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