The ABC corporation is contemplating purchasing a new computer system that would yield a before- tax return of 30 percent. The system would depreciate at a rate of 1 percent a year. The after-tax interest rate is 8 percent, the corporation tax rate is 35 percent, and a typical shareholder of ABC has a marginal tax rate of 30 percent. Assume for simplicity that there are no depreciation allowances or investment tax credits. Do you expect ABC to buy the new computer system? Explain your answer.
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