When evaluating project cash ﬂows in a ﬁnancial decision, __________.
A) Taxes can generally be ignored since they are a non-cash expense.
B) The ﬁnancial manager should compute and use the marginal tax rate.
C) The marginal tax rate and average tax rate are of equal importance.
D) The ﬁnancial manager should use the tax rate that is equal to the total tax liability divided by total taxable income.
E) Taxes are irrelevant unless income for the ﬁrm is greater than zero.

Question

Quizplus · Accepted Answer

In evaluating project cash flows, taxes are an important consideration. The financial manager should compute and use the marginal tax rate, as it reflects the percentage of each additional dollar of income that will be paid in taxes. The average tax rate, which is the total tax liability divided by taxable income, is less useful as it does not account for the progressive nature of the tax code. Therefore, choice B is the best answer. A, C, D, and E are all incorrect.

When Evaluating Project Cash ﬂOws in a ﬁNancial Decision, __________