Suppose that a business investment is subject to a 50-percent tax but that the return to private savings is not taxed.The after-tax rate of return on business investment is currently 9 percent.If a proposed government project is predicted to displace business investment, then the social rate of discount is:

Question

Quizplus · Accepted Answer

The after-tax rate of return on business investment is 9 percent, which means the pre-tax rate of return must be 18 percent (since half is taken away by taxes). This pre-tax rate is the appropriate social rate of discount if the government project displaces business investment, as it represents the opportunity cost of capital in the absence of taxes.

Suppose That a Business Investment Is Subject to a 50-Percent