Leto Inc.has $500,000 in an investment paying 8% annual taxable interest.Each year,the corporation incurs a $3,000 nondeductible cash expense relating to the investment.If Leto's marginal tax rate is 35%,compute the annual after-tax cash flow.

Question

Quizplus · Accepted Answer

The annual after-tax cash flow is $23,000. This is calculated as follows:Interest income: $500,000 x 8% = $40,000Nondeductible expense: $3,000Taxable income: $40,000 - $3,000 = $37,000Taxes: $37,000 x 35% = $12,950After-tax cash flow: $40,000 - $12,950 - $3,000 = $23,000

Leto IncHas $500,000 in an Investment Paying 8% Annual Taxable Interest