Homework SourseI need help with this practice question Please show me all t
I need help with this practice question! Please show me all the work for it!
Gold Corporation performed a treasury analysis this year and determined that it had $150,000 to invest into a new project this year. After much consideration, Gold narrowed down options to 2 mutually exclusive projects, A and B. Information on Projects A and B are below:
Project A Project B
Initial investment $150,000 (fixed cost) $150,000 (fixed cost)
Units to sell 5,000 8,500
Sales price per unit $100 $150
Variable costs per unit $35 $70
Project A will result in tax free income, while Project B’s income will be taxed at 25%. Which project should Gold Corporation choose and why?
Solution
Firstly we need to calculate the net income after tax from each project and then the project showing higher net income after tax should be choosed.
Calculation of net income after tax for both projects (Amounts in $)
As net income after tax of project B is more than project A, gold corporation should choose project B.
| Particulars | Project A | Project B |
| Sales (units to sell*Selling price) | (5,000*$100) 500,000 | (8,500*$150) 1,275,000 |
| Less: Variable costs (Units*Variable cost per unit) | (5,000*$35) (175,000) | (8,500*$70) (595,000) |
| Contribution | 325,000 | 680,000 |
| Less: Fixed costs (same) | (150,000) | (150,000) |
| Net Income before tax | 175,000 | 530,000 |
| Less: Income tax expense | 0 | (132,500) (25%) |
| Net Income after tax | 175,000 | 397,500 |
