Question: Firm E must choose between two alternative transactions. Transaction 1 requires a $9,000 cash outlay that would be nondeductible in the computation of taxable income.

Firm E must choose between two alternative transactions. Transaction 1 requires a $9,000 cash outlay that would be nondeductible in the computation of taxable income. Transaction 2 requires a $13,500 cash outlay that would be a deductible expense. Determine which transaction has the lesser after-tax cost, assuming that:
a. Firm E’s marginal tax rate is 20 percent.
b. Firm E’s marginal tax rate is 40 percent.

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