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Red Royal Recycling is evaluating the bowling alley project. During year 1, the bowling alley project...

Red Royal Recycling is evaluating the bowling alley project. During year 1, the bowling alley project is expected to have relevant revenue of 637,400 dollars, relevant variable costs of 247,400 dollars, and relevant depreciation of 62,600 dollars. In addition, Red Royal Recycling would have one source of fixed costs associated with the bowling alley project. Red Royal Recycling just signed a deal with Green Forest Marketing to develop an advertising campaign for use in the project. The terms of the deal require Red Royal Recycling to pay Green Forest Marketing either 138,600 dollars in 1 year if the project is pursued or 166,000 dollars in 1 year if the project is not pursued. Relevant net income for the bowling alley project in year 1 is expected to be 160,192 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

Income before taxes are paid is calculated in the folowing table. Contribution is calculated by subtracting sales from variable costs. Profit is calculated by subtracting depreciation from contribution. Net Income before tax is calculated by deducting the amount of deal signed with Green Forest Marketing. The project of the bowling alley will be continued since profit is being made by Red Royal Recycling and thus $138,600 is paid.

Sales 637400
Variable Costs 247400
Contribution 390000
Depreciation 62600
Profit 327400
Deal Signed 138600
Income before Tax 188800

Net Income after Taxes =  $160,192

Taxes = Income Before Taxes -  Net Income after Taxes = $188,800 - $160,192 = $ 28,608

Tax Rate = Taxes/Income before Taxes*100 = 28,608/188800*100 = 15.15%

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