Consider a public project involving an initial capital expenditure of $10,000 that will be financed entirely...

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Consider a public project involving an initial capital expenditure of $10,000 that will be financed entirely by borrowing in a closed, domestic financial market. Suppose the marginal rate of return on private investment is 1.5 percent and the marginal rate of time preference is 1.33 percent. Also suppose the tax on corporate profits is 30% and the tax on interest income is 50%. a. If 60% of the agency's financing requirement arises from displaced investment and 40% from induced savings, what social discount rate would be appropriate for project evaluation? b. If the supply of savings were perfectly inelastic, what social discount rate would be appropriate? Consider a public project involving an initial capital expenditure of $10,000 that will be financed entirely by borrowing in a closed, domestic financial market. Suppose the marginal rate of return on private investment is 1.5 percent and the marginal rate of time preference is 1.33 percent. Also suppose the tax on corporate profits is 30% and the tax on interest income is 50%. a. If 60% of the agency's financing requirement arises from displaced investment and 40% from induced savings, what social discount rate would be appropriate for project evaluation? b. If the supply of savings were perfectly inelastic, what social discount rate would be appropriate?

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