The American Recovery
Please use the following to respond to the questions (A,B,and C) presented below:The American Recovery and Reinvestment Act of 2009
On February 17, 2009, President Obama signed into law the American Recovery and Reinvestment Act. The Act, like the earlier Economic Stimulus Act of 2008, included a number of tax changes designed to help businesses and stimulate investment:
Bonus Depreciation. The Act extended a temporary rule (first passed as part of the Economic Stimulus Act of 2008) allowing additional first-year depreciation of 50% of the cost of the asset. By further accelerating the depreciation allowance, this measure increases the present value of the depreciation tax shields associated with new capital expenditures, raising the NPV of such investment.
Increased Section 179 Expensing of Capital Expenditures.
Section 179 of the tax code allows small- and medium-sized businesses to immediately deduct the full purchase price of capital equipment rather than depreciate it over time. Congress doubled the limit for this deduction to a maximum of $250,000 in 2008, and this higher limit was extended by the Act through 2009. Again, being able to receive the tax deductions for such expenses immediately increases their
present value and makes investment more attractive. Extended Loss Carrybacks for Small Businesses. Under the Act, small businesses could carry back losses incurred in 2008 for up to five years, rather than two years. While this extension did not directly affect the NPV of new investments, it meant struggling businesses were more likely to receive refunds of taxes already paid, providing much needed cash in the midst of the financial crisis.
A medium-sized company is planning to undertake a series of new projects. What kind of decisions would the firm need to make about cost of capital given their improved cash position? Cite sources with in-text citations.
Your small business client has decided to act on an investment his best friend told him about instead of taking your advice. His best friend is a millionaire but after investigating you are sure your client could put his additional cash to better use. How do you address this herd behavior and put him back on the right track?
Your medium-sized business client is trying to decide how much debt he wants to take on for a new project. How do you help her understand that risk and cost of capital for levered equity will be different than that risk and return of unlevered equity?
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Since a medium sized company needs to undertake capital investments, it should conform to the law in order for it to achieve maximum growth through minimization of cost of capital. The company should take advantage of the Economic stimulus act through purchasing more capital in order to gain from the economies of scale…………………………
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