Hank, a calendar-year taxpayer, uses the cash method of accounting for his sole proprietorship. In late December, he performed $25,000 of legal services for a client. Hank typically requires his clients to pay his bills immediately upon receipt. Assume his marginal tax rate is 30 percent this year and will be 33 percent next year, and that he can earn an after-tax rate of return of 12 percent on his investments. Use Exhibit 3.1.

a. What is the after-tax income if Hank sends his client the bill in December?

After Tax Income:

b. What is the after-tax income if Hank sends his client the bill in January? (Do not round intermediate calculations. Round your answer to 2 decimal places.)

After Tax Income:

c. Should Hank send his client the bill in December or January?

A.December

B January

d. What is the after-tax income if Hank expects his marginal tax rate to be 25 percent next year and sends his client the bill in January? (Do not round intermediate calculations. Round your answer to 2 decimal places.)

After Tax Income:

e. Should Hank send his client the bill in December or January if he expects his marginal tax rate to be 30 percent this year and 25 percent next year? A.December

B.January

Exhibit 3.1.

12% .898 .907 .842 .797 .735 EXHIBIT 3-1 Present Value of a Single Payment at Various Annual Rates of Return Year 4% 5% 6% 7% 8% 9% 10% 11% .962 .952 .943 .935 .926 .917 .909 .901 .925 .890 .873 .857 .826 .812 .889 .864 .840 .816 .794 .772 .751 .731 .855 .823 .792 .763 .708 .683 .659 .822 .784 .747 .713 .681 .650 .621 .593 .790 .746 .705 .666 .630 .596 .564 .535 .760 .711 .665 .623 .583 .547 .513 .482 .731 .677 .627 .582 .540 .502 .434 .703 .645 .592 .544 .500 460 .424 391 .676 .614 .558 .508 .422 386 .352 .650 .585 475 .388 350 .317 .557 .444 .397 .356 .319 .286 .601 .530 .469 .415 .368 326 .290 .258 .577 .505 .442 388 .340 .299 .263 .232 .555 481 417 362 .315 .275 .239 .209 .712 .636 .567 .507 452 404 361 .322 .287 .257 .467 .463 429 .527 .625 .497 229 .205 .183