Return to the start of Section 6.3, where we calculated the equivalent annual cost, in cents per gallon, of producing reformulated gasoline in California. Capital investment was $400 million. Suppose this amount can be depreciated for tax purposes on the 10-year MACRS schedule from Table 6.4. The marginal tax rate, including California taxes, is 39 percent, and the cost of capital is 7 percent. The refinery improvements have an economic life of 25 years.

a. Calculate the after-tax equivalent annual cost. It?s easiest to use the PV of depreciation tax shields as an offset to the initial investment.

b. How much extra would retail gasoline customers have to pay to cover this equivalent annual cost? Note: Extra income from higher retail prices would betaxed.

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Tax Depreciation Schedules by Recovery-Period Class 20-Year Year(s) 3-Year 5-Year 7-Year 10-Year 15-Year 20.00 14.29 5.00 33.33 10.00 3.75 44.45 14.81 32.00 24.49 18.00 9.50 7.22 19.20 11.52 17.49 14.40 8.55 7.70 6.68 7.41 12.49 11.52 4 6.18 6.93 6.23 11.52 8.93 9.22 5.71 5.76 8.93 7.37 5.28 8.93 6.55 5.90 4.89 4.52 4.46 4.45 6.55 5.90 6.55 5.90 10 6.55 5.90 4.46 4.46 4.46 11 3.29 5.90 5.90 12 13 5.90 4.46 14 5.90 4.46 15 5.90 4.46 16 2.99 4.46 17-20 4.46 21 2.25