Question

From the following details, calculate net profit before tax: Net Profit after tax = Rs. 50,000
15% Long-term debt = Rs. 12,00,000
Tax rate = 20%

• A. 1,80,000
• B. 1,50,000
• C. 62,500
• D. 72,500

Hint:

Always check carefully: If the question says Net Profit before tax (PBT), use PAT ÷ (1 – Tax rate). If they want EBIT, then add interest to PBT.

Answer 1

The Correct Option is B

Step 1: Relation between profit after tax (PAT) and profit before tax (PBT).
PAT = PBT – Tax.
Or, equivalently, PAT = PBT × (1 – Tax rate).

Step 2: Apply formula.
PAT = Rs 50,000.
Tax rate = 20% = 0.20.
So, \[ 50,000 = PBT \times (1 - 0.20) = PBT \times 0.80 \]

Step 3: Calculate PBT.
\[ PBT = \frac{50,000}{0.80} = 62,500 \]

Step 4: Adjust for interest on long-term debt.
PBT here means Profit Before Tax but after interest.
We need Net Profit before tax and before interest. Interest on long-term debt = 15% of 12,00,000 = Rs 1,80,000. Thus, Net Profit before tax (NPBT) = 62,500 + 1,80,000 = Rs 2,42,500.

Step 5: Re-check with options.
Wait: The question might mean "Net Profit before tax but after interest" (common in exams). In that case, answer = Rs 62,500. But if they include interest (true EBIT approach), it will be Rs 2,42,500. Since the given options don't list 2,42,500, the correct choice from the options is: \[ \boxed{62,500} \]