Question
A corporate taxpayer, who is subject to a marginal Federal tax rate of 40% is considering two mutually exclusive alternatives. Alternative A is to hire
A corporate taxpayer, who is subject to a marginal Federal tax rate of 40% is considering two mutually exclusive alternatives. Alternative A is to hire a public accounting firm at a cost of $50,000 to undertake research on a tax avoidance plan. If the plan is successful, it will save the corporation $40,000 in Federal income taxes. The probability of success for the plan is 65%. Alternative B is to hire a marketing firm at a cost of $45,000 to develop a new marketing strategy. If successful, the new marketing strategy would generate revenue of $55,000. The probability of success of the marketing idea is 90%. Which alternative should the corporation choose?
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