Question

Platinum Water Media is evaluating a project that would require the purchase of a piece of equipment for 830,000 dollars today. During year 1, the project is expected to have relevant revenue of 745,700 dollars, relevant costs of 254,200 dollars, and relevant depreciation of 63,000 dollars. Platinum Water Media would need to borrow 830,000 today for the equipment and would need to make an interest payment of 29,900 dollars to the bank in 1 year. Relevant operating cash flow for the project in year 1 is expected to be 338,183 dollars. What is the tax rate expected to be in year 1? Answer as a rate in decimal format so that 12.34% would be entered as .1234 and 0.98% would be entered as .0098

Answer 1

The tax rate can be calculated by solving the operating cash flow formula with the given figures. After calculation, the tax rate for year 1 is determined to be 35%, or 0.3500 in decimal format.

Step-by-step explanation:

The student is asking how to calculate the tax rate based on the project's expected relevant operating cash flow in year 1. To find the tax rate, we need to look at the formula for operating cash flow (OCF):

OCF = (Revenue - Costs - Depreciation) * (1 - Tax rate) + Depreciation

Using the provided figures:

• Revenue: $745,700
• Costs: $254,200
• Depreciation: $63,000
• OCF: $338,183

We need to solve for the Tax rate:

$338,183 = ($745,700 - $254,200 - $63,000) * (1 - Tax rate) + $63,000

After inputting all the figures and solving for the Tax rate we get:

Tax rate = 0.3500 or 35%