Chapter 13 Income Taxes
Chapter 13 Income Taxes
Chapter 13 Income Taxes
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186 <strong>Chapter</strong> <strong>13</strong> <strong>Income</strong> <strong>Taxes</strong><br />
Solution<br />
Effective rate = S + (1 - S)F<br />
= .074 + (1 - .074)(.34)<br />
= .074 + (.926).34<br />
= .074 + .3148<br />
= .3888 = 38.88%<br />
<strong>13</strong>-10<br />
A one-year savings certificate that pays 15% is purchased for $10,000. If the purchaser pays taxes<br />
at the 27% incremental income tax rate, the after tax rate of return on this investment is<br />
a. 4.05%<br />
b. 10.95%<br />
c. 15.00%<br />
d. 22.95%<br />
Solution<br />
After tax ROR = (1 - tax rate)(before tax IRR) = (1 - .27)(.15) = 10.95%<br />
The answer is b.<br />
<strong>13</strong>-11<br />
A corporation’s tax rate is 34%. An outlay of $35,000 is being considered for a new asset.<br />
Estimated annual receipts are $20,000 and annual disbursements $10,000. The useful life of the<br />
asset is 5 years and it has no salvage value.<br />
a) What is the prospective rate of return before income tax?<br />
b) What is the prospective rate of return after taxes, assuming straight-line depreciation?<br />
Solution<br />
StL Depreciation = (P – S) = = $7,000/year.<br />
Year BTCF Depreciation T.I. <strong>Taxes</strong> ATCF<br />
0 -35,000 - - - -35,000<br />
1 10,000 7,000 3,000 1,020 8,980<br />
2 10,000 7,000 3,000 1,020 8,980<br />
3 10,000 7,000 3,000 1,020 8,980<br />
4 10,000 7,000 3,000 1,020 8,980<br />
5 10,000 7,000 3,000 1,020 8,980<br />
a) ROR BEFORE TAX<br />
PW B = PW C<br />
10,000(P/A, i%, 5) = 35,000 At 12% P/A = 3.605
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