At the end of 2021, your company recorded taxable income of $12,556. Tax rate this year was 25%.

You are facing uncertainty regarding future income and tax rates and would like to prepare a scenario analysis.

You narrowed down the possibilities for next year to the following:

* Taxable income: 4 scenarios - a. Decrease of 5%, b. No change, c. Increase of 5%, d. Increase of 10%.

* Tax rate: 2 scenarios - a. 20%, b. 30%

1) What is net income (income after taxes) this year? (round your answer to the nearest dollar)

2) What is the maximum net income (income after tax) possible next year under these scenarios? (round your answer to the nearest dollar)

3) Suppose the probabilities of each of the scenarios descibed above are the same (12.5% each), what is your expected net income next year? (round your answer to the nearest dollar)

4) Suppose the probabilities for each scenario are the following:

	income -5%	income same	income +5%	income +10%
tax rate 20%	0.1	0.2	0.2	0.1
tax rate 30%	0.1	0.1	0.1	0.1

what is the expected net income next year? (round your answer to the nearest dollar)

5) Assume that the unconditional probabilities for each of the different income scenarios is the same (25% each). What is the probability associated with tax rate 30% that will bring your net income next year to the same net income as this year? (probability of each of the 8 scenarios is the product of the probability of a tax scenario and the probability of the income scenario - for example if the probability of tax rate decrease is 50% then the probability of the first cell in the above table will be 0.5*0.25=0.125) (enter your answer as a number between 0 and 1 rounded to the third decimal point - for example 43.669% should be entered as 0.437 )

Answer rating: 100% (QA)

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