When making capital budgeting decisions,the manager should utilize the marginal tax rate for the company instead of the average tax rate.

Question

Quizplus · Accepted Answer

The marginal tax rate is the tax rate on the last dollar of income earned and is the appropriate tax rate to use in capital budgeting decisions since these decisions are concerned with the incremental cash flows generated by the project. On the other hand, the average tax rate takes into account all income earned and all tax paid over a period of time, which may not accurately reflect the tax implications of a specific project or investment opportunity.

When Making Capital Budgeting Decisions,the Manager Should Utilize the Marginal