Below are two potential investment alternatives:
Assume straight-line amortization in all computations, and ignore income taxes.
-In capital budgeting, the relevant tax rate to consider is the
A) prior year tax rate.
B) average rate expected for the company.
C) marginal rate expected for the company.
D) highest rate that applies to U.S. corporations.

Question

Below are two potential investment alternatives:
  Assume straight-line amortization in all computations, and ignore income taxes.
-In capital budgeting, the relevant tax rate to consider is the
A) prior year tax rate. 
B) average rate expected for the company. 
C) marginal rate expected for the company. 
D) highest rate that applies to U.S. corporations.

Quizplus · Accepted Answer

The relevant tax rate to consider for capital budgeting is the marginal rate expected for the company. This is because it represents the tax rate that applies to the next dollar of taxable income, and therefore is most relevant for evaluating the cash flows associated with an investment. Choice A is incorrect because prior year tax rate may not reflect the current tax environment. Choice B is incorrect because it is an average rate, which may not accurately capture the tax implications of a specific investment. Choice D is incorrect because it is not specific to the company, and therefore may not accurately reflect the relevant tax rate for the investment.

Below Are Two Potential Investment Alternatives