Maurice Tutor

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    Argosy University/ Phoniex University/
    Nov-2005 - Oct-2011

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    Phoniex University
    Oct-2001 - Nov-2016

Category > Management Posted 05 Feb 2018 My Price 5.00

subtract depreciation allowances

Corporations in the United States are allowed to subtract depreciation allowances from their taxable income. The depreciation allowances are based on the purchase price of the capital; a corporation that buys a new capital good at time t can deduct fraction D(s ) of the purchase price from its taxable income at time t +s. Depreciation allowances often take the form of straight-line depreciation: D(s ) equals 1/T for s [0,T ], and equals 0 for s > T, where T is the tax life of the capital good.

(a) Assume straight-line depreciation. If the marginal corporate income tax rate is constant at τ and the interest rate is constant at i, by how much does purchasing a unit of capital at a price of PK reduce the present value of the firm’s corporate tax liabilities as a function of T, τ, i, and PK ? Thus, what is the after-tax price of the capital good to the firm?

(b) Suppose that i = r +π, and that π increases with no change in r. How does this affect the after-tax price of the capital good to the firm?

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Maurice Tutor
(5)
Status NEW Posted 05 Feb 2018 05:02 PM My Price 5.00

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