If the Red Monkey uses straight-line depreciation in its reported results, the annual depreciation expense on financial statements will be ($25.352 million / 5 years) = $5,070,400 per year. Pre-tax income (ignoring depreciation) will be ($14,384,000 revenue − $5,070,400 depreciation) = $9,313,600. At a 41% tax rate, reported income each year will equal ((1 – 0.41) × $9,313,600) = $5,495,024, ignoring expenses other than depreciation. Patel’s statement is correct.

On a tax basis, first-year depreciation will be ($25.352 million × 0.35) = $8,873,200 and pre-tax income will be ($14,384,000 – $8,873,200) = $5,510,800, again ignoring expenses other than depreciation. At a 41% tax rate, the after-tax income of the Red Monkey will be [(1 – 0.41) × $5,510,800] = $3,251,372. Jayagopal’s statement is also correct.