1. A company D has a taxable income of $216,000. Using the U. S federal income tax rates for corporations shown in table 16.1, what is Company D's income tax liability? Note: Table 16.1 is at the bottom of this document.
Questions 2 uses the following situation: A company that makes software-based embedded process control systems is thinking about developing a new product. This company's effective tax rate is 44%, and they are profitable overall. The company has established an after-tax MARR of 15%. The following table shows the estimated before-tax cash-flow stream for the project.
End of Year Before-Tax Cash-Flow Instance
0 -$75,000
1 $28,000
2 $34,000
3 $36,000
4 $34,000
5 $32,000
6 $30,000
2. What is the after-tax cash-flow stream for the project assuming that no depreciation and no loans are involved? What is the PW(i) of the after-tax cash-flow stream? What's the IRR of the after-tax cash-flow stream?
3. Blizzard Systems has an effective income tax rate of 35.5%. They also have a loan with an interest rate of 6.75%. What is the effective after-tax interest rate on their loan?
4. Mr. S has $5000 to invest. He can buy a 5-year municipal bond at face value that has a 7.25% interest rate. He can also buy a 5-year corporate bond with an interest rate of 9%. His effective income tax rate is 18%. Which of these investments would be better from an after-tax perspective?
Question 5a and 5b. relate to the following situation: XYZ Co. wants to get a special instrument to control a critical step in their production line. The instrument has an acquisition cost of $25,000 and will lead to a savings of $10,000 per year for 5 years. They want to evaluate different methods of financing the acquisition. Assume that if they buy it they will use MACRS depreciation for 3 years property. Their effective income tax rate is 44%, and their after-tax MARR is 16%. The rest of the corporation is profitable.
5a. What's the present worth of the after-tax cash-flow stream if they buy it using a loan for the full amount at 8% interest (assume annual payment)
5b. What's the present worth of the after-tax cash-flow stream if they lease it for the 5 years with annual payments of $5000? The lease payments will be due at the beginning of the year.
Question 6 relates to the following situation: A county government is considering three mutually exclusive software project proposals and is not required to select any of them. Project A1 requires an initial investment for $115,000 with net savings estimated to be $34,500 per year. The initial investment for the project A2 is $182,900, and net savings have been estimated at $56,000 per year. The initial investment for mproject A3 is $148,000, and net saving fors have been estimated at $41,000 per year. Each project has an estimated life of 5 years and no salvage value. The interest rate used by this county government is 13%.
6. Use benefit-cost analysis for multiple alternatives to demonstrate which of the proposals should be selected.
TABLE 16.1 U.S Federal Income Tax Rates for Corporations
Corporation's Taxable income Marginal Tax Rate
$0 to $50,000 15%
$50,001 to $75,000 25%
$75,001 to $100,000 34%
$100,001 to $335,000 39%
$335,001 to $10,000,000 34%
$10,000,001 to $15,000,000 35%
$15,000,001 to $18,333,333 38%
Over $18,333,334 35%