Chapter 2 HW Solutions

Chapter 2 HW Solutions - 3. Marginal Tax Rates Solution:...

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3. Marginal Tax Rates Solution: Currently, Beta Corporation’s marginal tax rate is 34%. Beta’s income would need to exceed $10,000,000 to step-up to the next tax bracket. Therefore, Beta Corporation should use a 34% marginal tax rate in evaluating a project that would generate an additional $200,000 in income. 4. Marginal Tax Rates Solution: Maria should use a 25% tax rate because her income is between $34,000 and $82,400. Her tax savings will be $500 ($2,000 deduction x 25%). 31. Timing Issues Solution: a. Monico should wait to bill its customers until the end of December. If Monico’s marginal tax rate is 25%, taxes paid this year would cost $1,250 ($5,000 x 25%) resulting in an after-tax cash inflow of $3,750 ($5,000 – $1,250). When considering the time value of money, the cost of the taxes that are deferred until next year will have a present value (cost) of only $1,179 ($1,250 x .943 PV factor) or $71 less ($1,250 - $1,179). b. Monico should defer billing its customers. If Monico’s marginal tax rate is 15% next year, then its after-tax cash inflow would be $4,293 [$5,000 – ($5,000 x 15% x .943 PV factor)]. Monico should defer billing its customers because this will result in a $543 higher after-tax cash inflow ($4,293 - $3,750). c.
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Chapter 2 HW Solutions - 3. Marginal Tax Rates Solution:...

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