Libro D Car1

Chapter 17

After-Tax Economic Analysis


Solutions to Problems


17.1 TI = GI – E – D
NPAT = (GI – E – D)(1 – T)

17.2 Income tax for an individual is based on the amount of money received from a salary for a job, contract for services rendered, and the like. Property tax is based on the appraised worth of things owned, such as house, car, and personal possessions like jewelry, art,etc.

17.3 (a) Net profit after taxes
(b) Taxable income
(c) Depreciation
(d) Operating expense
(e) Taxable income

17.4 (a) Company 1
TI = Gross income - Expenses - Depreciation
= (1,500,000 + 31,000) – 754,000 – 148,000
= $629,000
Taxes = 113,900 + 0.34(629,000 – 335,000)
= $213,860

Company 2TI = (820,000 + 25,000) – 591,000 – 18,000
= $236,000
Taxes = 22,250 + 0.39(236,000 – 100,000)
= $75,290

(b) Co. 1: 213,860/1.5 million = 14.26%
Co. 2: 75,290/820,000 = 9.2%

(c) Company 1
Taxes = (TI)(Te) = 629,000(0.34) = $213,860
% error with graduated tax = 0%


Company 2Taxes = 236,000(0.34) = $80,240

% error = 80,240 – 75,290 (100%) = + 6.6%
75,290


17.5 Taxes using graduated rates:

Taxes on $300,000: 22,250 + 0.39(200,000)
= $100,250


(a) Average tax rate = 100,250/300,000 = 34.0%

(b) 34% from Table 17.1

(c) Taxes = 113,900 + 0.34(165,000) = $170,000Average tax rate = 170,000/500,000 = 34.0%

(d) Marginal rate is 39% for $35,000 and 34% for $165,000. Use Eq. [17.3].
NPAT = 200,000 – 0.39(35,000) – 0.34(165,000) = $130,250

17.6 Te = 0.076 + (1 – 0.076)(0.34) = 0.390
TI = 6.5 million – 4.1 million = $2.4 million
Taxes =2,400,000(0.390) = $936,000

17.7 (a) Te = 0.06 + (1 – 0.6)(0.23) = 0.2762

(b)Reduced Te = 0.9(0.2762) = 0.2486

Set x = required state rate
0.2486 = x + (1-x)(0.23)
x = 0.0186/0.77 = 0.0242 (2.42%)

(c) Since Te = 22% is lower than the current federal rate of 23%, no state tax could be levied and an interest free grant of 1% of TI, or $70,000, would have to be made available.

17.8 (a) Federal taxes = 13,750 + 0.34(5000) = $15,450 (usingTable 17-1 rates)

Average federal rate = (15,450/80,000)(100%)

= 19.3%

(b) Effective tax rate = 0.06 + (1 – 0.06)(0.193)
= 0.2414

(c) Total taxes using effective rate = 80,000(0.2414) = $19,314


(d) State: 80,000(0.06) = $4800


Federal: 80,000[0.193(1 – 0.06)] = 80,000(0.1814) = $14,514


17.9 (a) GI = 98,000 +7500 = $105,500
TI = 105,500 – 10,500 = $95,000

Using the rates in Table 17-2:

Taxes = 0.10(7000) + 0.15(28,400-7000)
+ 0.25(68,800 – 28,400) + 0.28(95,000 – 68,800)
= 0.10(7000) + 0.15(21,400) + 0.25(40,400) + 0.28(26,200)
= $21,346

(b) 21,346/98,000 = 21.8%

(c) Reducedtaxes = 0.9(21,346) = $19,211


From part (b), taxes are determined from the relation below where x = new TI.


Taxes = 19,211 = 0.10(7000) + 0.15(21,400) + 0.25(40,400) + 0.28(TI – 26,200)
= 700 + 3210 + 10,100 + 0.28(x – 68,800)
= 14,010 + 0.28(x – 68,800)

0.28x = 24,465
x = $87,375

From part (a),set TI = $87,375 andlet y = new total of exemptions and deductions

TI = 87,375 = 105,500 – y
y = $18,125

Total would have to increase from $10,500 to $18,125, which is a 73% increase. This is not likely to be possible.

17.10 NPAT = GI – E – D – taxes

CFAT = GI – E – P + S – taxes

Consideration of depreciation is a fundamental difference. The NPAT expression deducts...