Hearing the news of a potential corporate tax-cut

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A financial analyst becomes excited hearing the news of a potential corporate tax-cut. The government is going to lower the tax rate from 35% to 21%. He thinks a lower rate will lessen the tax bill on the proposed project and thus, increase the net income. However, when working on his capital budgeting problem, he notices that the net income of his project actually goes down under the new lower tax rate - exactly opposite of what he expected. Explain why might this happen.

Reference no: EM132507067

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