Look at the last question where you calculated the equivalent annual cost 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%, the cost of capital is 7%, and there is no inflation. The refinery improvements have an economic life of 25 years.

a. Calculate the after-tax equivalent annual cost.

b. How much extra would retail gasoline customers have to pay to cover this equivalent annual cost?

TABLE 6.4

Tax Depreciation Schedules by Recovery-Period Class Year(s3-year5-year 7-year 10-year15-year 20-year 14.29 24.49 17.49 12.49 8.93 8.92 8.93 4.46 20.00 32.00 19.20 11.52 11.52 5.76 10.00 18.00 14.40 11.52 9.22 7.37 6.55 33.33 44.45 14.81 7.41 3.75 7.22 6.68 6.18 5.71 9.50 7.70 5 8 4.52 4.46 4.46 4.46 4.46 4.46 4.46 4.46 4.46 4.46 2.23 5.91 10 10 5.91 5.90 5.91 12 13 14 15 16 17 18 12 13 14 15 16 17-20 21 5.91