Assignment:
Suppose the tax rate is 30% if taxable income is positive and 0% if taxable income is negative. Calculate the expected tax payable for the following four projects. Note that for each project the expected taxable income is $50,000. For each project, also calculate the expected average tax rate (expected total taxes divided by expected taxable income). Explain and discuss your results.
a. Certain payoff $50,000
b. 50% chance of $100,000 and a 50% chance of $0
c. 50% chance of $200,000 and a 50% chance of a loss of $100,000
d. 50% chance of $500,000 and a 50% chance of loss of $400,000
This problem can be solved by preparing a graph.
Q1. Draw in the tax-rate schedule for taxable income in the range −$500,000 to +$500,000 with taxable income on the horizontal axis and tax payable on the vertical axis.
Q2. Mark the two endpoints on the tax schedule for each project. (For project 2 the two endpoints are $0 and $50,000.) Draw a straight line between the two outcomes.
Q3. Draw a vertical line upward from the horizontal axis at taxable income equal to $50,000.
Q4. Finally, read off the expected tax payable for each project where the expected tax payable is the intersection point of the lines in (2) and (3).
Provide complete and step by step solution for the question and show calculations and use formulas.