Suppose that the corporate tax rate is 25%, there is an investment tax credit of 10%, the depreciation rate is 5%, and dividend yield is 10%. The official depreciation schedule is such that the present discounted value of depreciation allowances is 40% of the purchase price of the machine.
a. Calculate the per-period marginal cost of each dollar that the firm spends on the machine.
b. If the marginal benefit per period is MB = 40 – 0.6K, where K is the number of dollars spent on the machine, what is the optimal amount of machinery purchased?
c. How would your answer change if the investment tax credit increased to 20%?

  • CreatedApril 25, 2015
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