Assume the firm’s after tax cost of capital is 6% per annum. What is the benefit of deferring $ 1 of income for 1 year, for 2 years, and for 5 years assuming the firm’s marginal tax rate is 35%? Suppose the firm expects the top statutory tax rate to increase to 40% next year. Does it still pay to defer income for 1 year, for 2 years, or for 5 years? Explain and discuss your results.
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