Advanced Anatomists, Inc., researchers in medical science, is contemplating a commercial venture concentrating on proteins based on the new X-ray technology of free-electron lasers. To recover the huge investment needed, an annual $2.5 million CFAT is needed. A favored average federal tax rate of 20% is expected; however, state taxing authorities will levy an 8% tax on TI. Over a 3-year period, the deductible expenses and depreciation are estimated to total $1.3 million the first year, increasing by $500,000 per year thereafter. Of this, 50% is operating expenses and 50% is depreciation. What is the required gross income each year?
What will be an ideal response?
CFBT = CFAT + taxes
GI – E = CFAT + (GI – E – D)(Te)
Solve for GI to obtain a general relation for each year t:
GIt = [CFAT + E(1- Te) - DTe]/ (1- Te)
Where: CFAT = $2.5 million
Te = 8% + (1- 0.08)(20%) = 26.4%
1- Te = 0.736
Year 1: GI1 = [2.5 million + 650,000(0.736) – 650,000(0.264)]/0.736
= $3,813,587
Year 2: GI2 = [2.5 million + 900,000(0.736) – 900,000(0.264)]/0.736
= $3,973,913
Year 3: GI3 = [2.5 million + 1,150,000(0.736) – 1,150,000(0.264)]/0.736
= $4,134,239
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