Taxes are costs, and, therefore, changes in tax rates can affect consumer prices, project lives, and the value of existing firms. Evaluate the change in taxation on the valuation of the following project:Assumptions: Tax depreciation is straight-line over three years. Pre-tax salvage value is 25 in Year 3 and 50 if the asset is scrapped in Year 2. Tax on salvage value is 40% of the difference between salvage value and book value of the investment. The cost of capital is 20%.The table is attachedPlease verify that the information above yields NPV = 0.If you decide to terminate the project in Year 2, what would be the NPV of the project?Suppose that the government now changes tax depreciation to allow a 100% write-off in Year 1. How does this affect your answers to parts a and b above? 1. Initial investment2. Revenues3. Cash operating costs4. Tax depreciation5. Income pretax6. Tax at 40%7. Net income8. After-tax salvage9. Cash flow (7 +8+4-1)NPV at 20% = 0100-1001005033.3316.676.6710+43.3321005033.3316.676.6710+43.3331005033.3316.676.671015+58.33

A firm, project, or investment's future stream of payments is valued today using a method known as…

Answered: Taxes are costs, and, therefore,…

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

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Taxes are costs, and, therefore, changes in tax rates can affect consumer prices, project lives, and the value of existing firms. Evaluate the change in taxation on the valuation of the following project:

Assumptions: Tax depreciation is straight-line over three years. Pre-tax salvage value is 25 in Year 3 and 50 if the asset is scrapped in Year 2. Tax on salvage value is 40% of the difference between salvage value and book value of the investment. The cost of capital is 20%.The table is attached

Please verify that the information above yields NPV = 0.
If you decide to terminate the project in Year 2, what would be the NPV of the project?
Suppose that the government now changes tax depreciation to allow a 100% write-off in Year 1. How does this affect your answers to parts a and b above?

1. Initial investment
2. Revenues
3. Cash operating costs
4. Tax depreciation
5. Income pretax
6. Tax at 40%
7. Net income
8. After-tax salvage
9. Cash flow (7 +8+4-1)
NPV at 20% = 0
100
-100
100
50
33.33
16.67
6.67
10
+43.33
2
100
50
33.33
16.67
6.67
10
+43.33
3
100
50
33.33
16.67
6.67
10
15
+58.33

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