Marina Sabatini – 201900217

Tax Accounting – Chapter 4 Assignment

2) a. Tax liability = 4,453.50 + [ (42,500 – 38,700) x 22% ]

4,453.50 + (3,800 x 22%)

4,453.50 + 836 = 5,289.5

Marginal tax rate = 22%

Average tax rate = 5,289.5 / 42,500 = 12.44%

b. Tax liability = 14,089.50 + [ (150,500 – 82,500) x 24% ]

14,089.50 + (68,000 x 24%)

14,089.50 + 16,320 = 30,409.5

Marginal tax rate = 24%

Average tax rate = 30,409.5 / 150,500 = 20.2%

c. Tax liability = 44,298 + [ (275,000 – 200,000) x 35% ]

44,298 + (75,000 x 35%)

44,298 + 26,250 = 70,548

Marginal tax rate = 35%

Average tax rate = 70,548 / 275,000 = 25.65%

d. Tax liability = 161,379 + [ (620,000 – 600,000) x 37% ]

161,379 + (20,000 x 37%)

161,379 + 7,400 = 168,779

Marginal tax rate = 37%

Average tax rate = 168,779 / 620,000 = 27.22%

6) a. Company G : 85,000 x 30% = 25,500

After-tax cash = 85,000-25,500 = 59,500.

b. Company J : 85,000 x 21% = 17,850

After-tax cash = 85,000- 17,850 = 67,150.

c. pay 59,500 to company G

and Company J gets 85,000.

9) a. y0 y1 y2 y3

Before tax cash flow 12,000 21,000 24,000 17,600

Tax cost (30%) (3,600) (6,300) (7,200) (5,280)

After tax cash flow 8,400 14,700 16,800 12,320

Discount factor (7%) 0.935 0.873 0.816

Present value 8,400 13,744 14,666 10,053

NPV = 14,863

b. y0 y1 y2 y3

Before tax cash flow 0 0 57,000 17,600

Tax cost (30%) 0 0 (17,100) (5,280)

After tax cash flow 0 0 39,900 12,320

Discount factor (7%) 0.873 0.816

Present value 0 0 34,833 10,053

NPV = 44,886

c. y0 y1 y2 y3

Before tax cash flow 12,000 21,000 24,000 17,600

Tax cost (30%) 0 0 (17,100) (5,280)

After tax cash flow 12,000 21,000 6,900 12,320

 Discount factor (7%) 0.935 0.873 0.816

Present value 12,000 19,635 6,024 10,053

NPV = 47,712

10) Cash flow x (1-tax rate)

= 100,000 x (1-0.21)

= 100,000 x 0.79

NPV = 79,000

If firm H receives 50,000 in year 1 and year2

= 0 + (50,000 x 6%, y2) x (1-0.21)

= 0 + (50,000 x 1.833 x 0.79)

= 0 + 72,403

= 72,403

NPV decreases by 6,597 if firm H restricted the transaction.

11) If firm H increases marginal tax rate to 30%

Cash flow x (1-tax rate)

= 100,000 x (1-0.30)

= 100,000 x 0.70

NPV = 70,000

If firm H receives 50,000 in year 1 and year2

= 0 + (50,000 x 6%, y2) x (1-0.30)

= 0 + (50,000 x 1.833 x 0.70)

= 0 + 64,155

= 64,155
NPV decreases by 8,248 if the marginal tax rate changes from 21% to 30%

24) a. explicit tax: firm L pays 30,000 x 21% = 6,300 and no implicit tax on investment A

Implicit tax: Firm L pays 30,000-24,000 = 6,000 and no explicit tax on investment B

b. explicit is more than implicit tax, so firm L should invest in the latter.

After tax cash flow of Investment A= 23,700 (30,000-6,300)

After tax cash flow of investment B = 24,000