A project requires an initial investment of $100,000 and is expected to produce a cash inflow before tax of $27,200 per year for five years. Company A has substantial accumulated tax losses and is unlikely to pay taxes in the foreseeable future. Company B pays corporate taxes at a rate of 21% and can claim 100% bonus depreciation on the investment. Suppose the opportunity cost of capital is 10%. Ignore inflation.
A project requires an initial investment of $100,000 and is expected to produce a cash inflow before tax of $27,200 per year for five years. Company A has substantial accumulated tax losses and is unlikely to pay taxes in the foreseeable future. Company B pays corporate taxes at a rate of 21% and can claim 100% bonus depreciation on the investment. Suppose the opportunity cost of capital is 10%. Ignore inflation.
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Transcribed Image Text:Problem 6-15 Project NPV and IRR
A project requires an initial investment of $100,000 and is expected to produce a cash inflow before tax of $27,200 per year for five
years. Company A has substantial accumulated tax losses and is unlikely to pay taxes in the foreseeable future. Company B pays
corporate taxes at a rate of 21% and can claim 100% bonus depreciation on the investment. Suppose the opportunity cost of capital is
10%. Ignore inflation.
a. Calculate project NPV for each company. (Do not round intermediate calculations. Round your answers to the nearest whole
dollar amount.)
NPV
Company A
Company B
b. What is the IRR of the after-tax cash flows for each company? (Do not round intermediate calculations. Enter your answers as a
percent rounded to 1 decimal places.)
IRR
Company A
%
Company B
%
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