Question

A proposed new investment has projected sales of $585,000. Variable costs are 44 percent of sales, and fixed costs are $187,000; depreciation is $51,000. Prepare a pro forma income statement assuming a tax rate of 21 percent. What is the projected net income?

Answer 1

The projected net income for the new investment, calculated using the provided revenue and cost figures with a 21 percent tax rate, amounts to $70,784.

Step-by-step explanation:

Pro Forma Income Statement Calculation

To calculate the projected net income, we will follow a step-by-step approach:

1. Compute variable costs by taking 44 percent of projected sales: Variable Costs = 0.44 × $585,000.
2. Subtract variable costs and fixed costs from projected sales to find Earnings Before Interest and Taxes (EBIT).
3. Subtract depreciation from EBIT to get Earnings Before Taxes (EBT).
4. Calculate the tax expense by multiplying the EBT by the tax rate of 21 percent.
5. Subtract the tax expense from EBT to find the projected net income.

Now, let's apply these steps to the given figures:

• Variable Costs = 0.44 × $585,000 = $257,400
• EBIT = $585,000 - $257,400 - $187,000 = $140,600
• EBT = $140,600 - $51,000 = $89,600
• Tax Expense = 21% × $89,600 = $18,816
• Projected Net Income = $89,600 - $18,816 = $70,784

The projected net income for the new investment is $70,784.