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When analyzing the cash flows from a new project proposal, a company should always use its...

When analyzing the cash flows from a new project proposal, a company should always use its average tax rate.

Select one: O a. True O b. False

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Answer #1

In most of the questions that we study in finance theory and solve for NPV they hardly differentiate between average tax rate and marginal tax rate but when we are evaluating the cash flow from a new project the company should consider using its marginal tax rate because marginal tax rate is the tax rate on next income.

So, the answer is b. False

Marginal tax rate is more appropriate if the cash flows are very large from the current income because then the tax rate will also be different.

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