The total capital investment for a proposed chemical plant, which will produce $1,500,000 worth of goods per year, is estimated to be $1M. It will be necessary to do a considerable amount of research and development work on the project before the final plant can be constructed, and mgt wishes to estimate the permissible Rand D costs. It has been decided that the after-tax return from the plant should be sufficient to pay off the total cap. Investment plus all res. And dev. Costs in 7 years. A return after taxes of at least 12 % 0f sales must be obtained. Bec. R and D is an expense and the co. income tax rate is 35% of gross earnings , only 65% of the funds spent on R and D must be recovered after taxes are paid. Under these conditions ,
The total capital investment for a proposed chemical plant, which will produce $1,500,000 worth of goods per year, is estimated to be $1M. It will be necessary to do a considerable amount of research and development work on the project before the final plant can be constructed, and mgt wishes to estimate the permissible Rand D costs. It has been decided that the after-tax return from the plant should be sufficient to pay off the total cap. Investment plus all res. And dev. Costs in 7 years. A return after taxes of at least 12 % 0f sales must be obtained. Bec. R and D is an expense and the co. income tax rate is 35% of gross earnings , only 65% of the funds spent on R and D must be recovered after taxes are paid.
Under these conditions , what is the total amount the company can afford to pay for res. And dev.?
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