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Question 2: A firm invests $10,000 in a new machine during 2016. Extra profits amount to $6,600 in 2017 and $4,840 in 1998. The economic

Question 2: A firm invests $10,000 in a new machine during 2016. Extra profits amount to $6,600 in 2017 and $4,840 in 1998. The economic depreciation rates are $5,600 in 2017 and $4,400 in 2018. The market discount rate is 10% and there is a 25% corporate income tax. Show that

(a) the net NPV of taxes paid under the immediate expensing method is 0,

(b) the after-tax rate of return using economic depreciation is 7.5%

(c) the after-tax rate of return using the Harberger method with 40% immediate expensing, is about 8.33%.

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