Question

company must choose between two alternate transactions. the cash generated by transaction 1 is taxable, and the cash generated by transaction 2 is nontaxable.
required:
a. determine the marginal - tax rate at which the after - tax cash flows from the two transactions are equal assuming that transaction 1 generates $127,000 of income and transaction 2 generates $95,250 of income.
b. determine the marginal tax rate at which the after - tax cash flows from the two transactions are equal assuming that transaction 1 generates $237,000 of income and transaction 2 generates $177,750 of income.
complete this question by entering your answers in the tabs below.
required a required b
determine the marginal tax rate at which the after - tax cash flows from the two transactions are equal assuming that transaction 1 generates $127,000 of income and transaction 2 generates $95,250 of income.
marginal tax rate %

Explanation:

Step1: Set up the equation

Let the marginal - tax rate be $t$. The after - tax cash flow of Transaction 1 is $(1 - t)\times127000$ (since it is taxable), and the after - tax cash flow of Transaction 2 is 95250 (since it is non - taxable). Set them equal: $(1 - t)\times127000=95250$.

Step2: Solve for $t$

First, divide both sides of the equation by 127000: $1 - t=\frac{95250}{127000}=0.75$. Then, subtract 1 from both sides and multiply by - 1 to get $t = 1-0.75 = 0.25$.

Step3: For part b

Let the marginal - tax rate be $t$. The after - tax cash flow of Transaction 1 is $(1 - t)\times237000$, and the after - tax cash flow of Transaction 2 is 177750. Set up the equation $(1 - t)\times237000=177750$.

Step4: Solve for $t$ in part b

Divide both sides by 237000: $1 - t=\frac{177750}{237000}=0.75$. Then, $t = 1 - 0.75=0.25$.

Answer:

a. 25%
b. 25%