Question
You are the chief financial officer of Lion Corporation. You must decide how to use $100,000 in excess funds that Lion Corp has available to
You are the chief financial officer of Lion Corporation. You must decide how to use $100,000 in excess funds that Lion Corp has available to invest. One option is to pay off a short-term note on which Lion is paying 11 percent interest. Another option is to purchase a municipal bond which is yielding 8.5 percent interest, tax-free. A third option is to invest the $100,000 in an experimental process designed to reduce Lions production costs. The research department expects that the process will reduce costs by $84,000; however, the expenditure will generate a tax deduction of $100,000 (for the investment in the experimental process) and a tax credit of $20,000. Which use of the money should you choose if Lions marginal tax rate is 15 percent? 25 percent? 34 percent?
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