Quinn owns a local salon. She wants to update her shop with new customer massage chairs and work stations for her nail technicians. If the Fed were to lower interest rates by 1.5 percentage points, at the same time that the government increased the tax rate by 1.5%, she could immediately conclude that updating her shop would not increase or decrease her financial position.

Question

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If Quinn applies and gets a loan to update her shop, she will have to pay a percentage annually on the principle of the loan. We do not know the loan amount, so we do not know the dollar amount of deductible loan expense. Taxes are paid on profits, after we deduct all applicable expenses. Since we don't know the deductible dollar amount of interest expense, nor do we know the dollar amount that Quinn will pay in taxes, we are unable to determine if the percentage increase or decrease in taxes would be a wash.

Quinn Owns a Local Salon