Finance

Finance

A company is thinking of locating a manufacturing plant in one of two states. The state and local tax system are different between the two states:

State A:

·      Effective S&L Property tax: 1.0%

·      S&L Retail Sales Tax: 9.0%

·      Gross Receipts Tax is: 0.5%

·      Effective State Corporate Income Tax: —

State B

·      Effective S&L Property tax: 1.2%

·      S&L Retail Sales Tax: —

·      Gross Receipts Tax is: —

·      Effective State Corporate Income Tax: 5.7%

The amount of investment in either state is the same: $75 million (both land and plant and equipment; expenditures on plant and equipment are exempt from sales tax in State A). For property tax purposes the assessed value of plant is $75 million. Annual gross sales are expected to be $250 million. Operating expenses, excluding labor and taxes, are expected to be $187.5 million per year; which included $7.5 million of items subject to sales tax in State A. The plant will be hiring 550 employees; salaries, wages and benefits are higher in State B than in State A. In sate A the average wage plus benefits is $40; in State B it is $42.50. Assuming an average work year of 2,000 hours the labor bill in State A is $44 million and in State B it is %46.75 million. The Federal income tax rate is 34% paid on earning after expenses and state and local taxes.

(a) What is the difference in state and local taxes paid between the two states?

(b) After 10 years (assume the plant is constructed in year zero and then operates for 10 years thereafter), what is the internal rate of return for the investment after all taxes?

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