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Example: Marginal Vs. Average Rates Suppose your firm earns $4 million in taxable income. What is the firm's tax liability? ● ● What is the average tax rate? What is the marginal tax rate? 50,000 0.15 25,000*0.25 25000 0.34 235000*0.39 (4,000,000-335,000) *0.34 Total tax liability Average tax rate Marginal tax rate 7,500 6,250 8,500 91,650 1,246,100 1,360,000 If f you are considering a project that will increase the firm's taxable income by $1 million, what tax rate should you use in your analysis? Is it marginal or average tax rate that is normally relevant for financial decision making? 34% 34%

Example: Marginal Vs. Average Rates Suppose your firm earns $4 million in taxable income. What is the firm's tax liability? ● ● What is the average tax rate? What is the marginal tax rate? 50,000 0.15 25,000*0.25 25000 0.34 235000*0.39 (4,000,000-335,000) *0.34 Total tax liability Average tax rate Marginal tax rate 7,500 6,250 8,500 91,650 1,246,100 1,360,000 If f you are considering a project that will increase the firm's taxable income by $1 million, what tax rate should you use in your analysis? Is it marginal or average tax rate that is normally relevant for financial decision making? 34% 34%

FINANCIAL ACCOUNTING
FINANCIAL ACCOUNTING
10th Edition
ISBN:9781259964947
Author:Libby
Publisher:Libby
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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# Example: Marginal Vs. Average Rates Suppose your firm earns $4 million in taxable income. - What is the firm’s tax liability? - What is the average tax rate? - What is the marginal tax rate? ### Tax Calculation Table | Taxable Income Bracket | Tax Calculation | Tax Amount | |-------------------------------|------------------------------------|-------------| | $0 – $50,000 | $50,000 * 0.15 | $7,500 | | $50,001 – $75,000 | $25,000 * 0.25 | $6,250 | | $75,001 – $100,000 | $25,000 * 0.34 | $8,500 | | $100,001 – $335,000 | $235,000 * 0.39 | $91,650 | | $335,001 – $4,000,000 | ($4,000,000 – 335,000) * 0.34 | $1,246,100 | **Total tax liability:** $1,360,000 **Average tax rate:** 34% **Marginal tax rate:** 34% ### Analysis Consideration If you are considering a project that will increase the firm’s taxable income by $1 million, what tax rate should you use in your analysis? Is it marginal or average tax rate that is normally relevant for financial decision making?
Transcribed Image Text:# Example: Marginal Vs. Average Rates Suppose your firm earns $4 million in taxable income. - What is the firm’s tax liability? - What is the average tax rate? - What is the marginal tax rate? ### Tax Calculation Table | Taxable Income Bracket | Tax Calculation | Tax Amount | |-------------------------------|------------------------------------|-------------| | $0 – $50,000 | $50,000 * 0.15 | $7,500 | | $50,001 – $75,000 | $25,000 * 0.25 | $6,250 | | $75,001 – $100,000 | $25,000 * 0.34 | $8,500 | | $100,001 – $335,000 | $235,000 * 0.39 | $91,650 | | $335,001 – $4,000,000 | ($4,000,000 – 335,000) * 0.34 | $1,246,100 | **Total tax liability:** $1,360,000 **Average tax rate:** 34% **Marginal tax rate:** 34% ### Analysis Consideration If you are considering a project that will increase the firm’s taxable income by $1 million, what tax rate should you use in your analysis? Is it marginal or average tax rate that is normally relevant for financial decision making?
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