A hotel's owners desire a return of 20% (after tax) on their investment of 10 million dollars. If corporation tax is 37.5%, what is the required income before tax?
A) 0.75 million
B) 2 million
C) 3.2 million
D) 6.25 million

Question

Quizplus · Accepted Answer

To calculate the required income before tax, we need to first calculate the after-tax return that the hotel owners desire.

If they want a 20% return after tax, then the pre-tax return they require is:
20% / (1 - 37.5%) = 32%

Now, we can calculate the required income before tax:
$10 million x 32% = $3.2 million

Therefore, the best choice is C) 3.2 million.

A Hotel's Owners Desire a Return of 20% (After Tax)