Question

Gomi Waste Disposal is evaluating a project that would require the purchase of a piece of equipment for 157,000 dollars today. During year 1, the project is expected to have relevant revenue of 107,000 dollars, relevant costs of 36,000 dollars, and relevant depreciation of 27,000 dollars. Gomi Waste Disposal would need to borrow 157,000 dollars today to pay for the equipment and would need to make an interest payment of 3,000 dollars to the bank in 1 year. Relevant net income for the project in year 1 is expected to be 38,966 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

Income Statement for Year 1
Revenue	107,000
Less: costs	36,000
Depreciation	27,000
EBIT	44,000
Less: Interest	3,000
Income before Tax	41,000
Less: Taxes = Income before taxes - Net Income	2,034
Net Income	38,966
Hence, tax rate = Tax expense/Income before tax	0.04960976

i.e. 0.0496