Microtech Software Corporation (MSC) was founded in 2001. The founder, Chan Li, studied at MIT and worked for a large software corporation before returning to his hometown, Centervale, to set up his own company.
The corporate tax rate structure applicable in Centervale is as follows:
Taxable Income Tax Rate
Up to $50,000 15 percent
From $50,001 through $150,000 22 percent
Income in excess of $150,000 30 percent
MSC has an opportunity to invest in a project that is expected to generate an additional $55,000 of taxable income.
Compute the tax cost of this additional income for the following three scenarios:
- MSC’s taxable income before the additional income is $45,000.
- MSC’s taxable income before the additional income is $300,000.
- MSC has a loss of $5,000 before considering the additional income.
Show all the steps of the calculation and the final answer for each scenario. Compare the results for the three scenarios and comment on any differences.
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