Answer:
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Explanation:
Given information :
>Suppose the new machinery cost $504
> Marginal benefit of new machine = 246 - 6 K
> k is the number of machine purchase
> depreciation rate = 12%
> dividend yield = 6%
> corporate tax = 35%
To provide the marginal cost of each dollar in the following situation
a) Firm allowed expenses with no tax credit
To find the optimal investment
Marginal Benefit = Marginal cost
in the given case the marginal cost of investment is sum of depreciation and dividends
ie., 0.12+0.6 = 0.18
setting that marginal cost equal to marginal benefit of 246-6K and for solving for K yields
ie.,0.18=246-6K
> 6K=246-0.18
> K = (246-0.18)/6
>K =40.97 units of machines purchased
when firm can expense( take full depreciation immediately) the cost of investment is reduced by 35% of tax ie., 35 cents per each dollar spent
Therefore., The marginal cost of the investment = (246 -(6*40.97))(1-0.35)
= (246-245.82)(0.65)
= 0.117 per dollar
b) Investment tax credit of 8%
An investment tax credit reduces the cost of investment even further. if the investment tax credit were included in the tax system described in question a, the net cost of the firm would be
(Depreciation + Dividend)(1-0.35- the ITC)
=(0.12+0.06)(0.65-0.08)
=(0.18)(0.57)
=0.1026 per dollar
