Reference no: EM13864993

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%