Question

Hyundai is considering opening a plant in two neighboring states.

Option 1: One state has a corporate tax rate of 10 percent. If operated in this state, the plant is expected to generate $1,420,000 pretax profit.

Option 2: The other state has a corporate tax rate of 2 percent. If operated in this state, the plant is expected to generate $1,380,000 of pretax profit.

a. What is the after state taxes profit in the state with the 10% tax rate?

       

b. What is the after state taxes profit in the state with the 2% tax rate?

       

c. Which state should Hyundai choose?

       

Option 1

Option 2

Answer 1

Answer:- Hyundai should choose to operate the plant in the state with the 2 percent tax rate.

Explanation:
Hyundai should choose to operate the plant in the state with the 2 percent tax rate.

Operating the plant in this state would generate $1352400 of profits after state taxes (i.e., $1380000 − (2 percent *$1380000) = $1352400) versus $1278000 of profits after state taxes (i.e., $1420000 − (10 percent * $1420000) = $1278000) in the state with the 10 percent tax rate.