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LO.2, 11 Heather wants to invest $40,000 in a relatively safe venture and has discovered two alternatives that would produce the following reportable ordinary income and loss over the next three years:
She is interested in the after-tax effects of these alternatives over a three-year horizon. Assume that Heather’s investment portfolio produces sufficient passive activity income to offset any potential passive activity loss that may arise from these alternatives, that her cost of capital is 6%, that she is in the 24% tax bracket, that each investment alternative possesses equal growth potential, and that each alternative exposes her to comparable financial risk. In addition, assume that in the loss years for each alternative, there is no cash flow from or to the investment (i.e., the loss is due to depreciation), whereas in those years when the income is positive,
- a. Based on these facts, compute the present value of these two investment alternatives and determine which option Heather should choose. Refer to Appendix H for the present value factors.
- b. Prepare your solution using spreadsheet software such as Microsoft Excel.
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Chapter 11 Solutions
Individual Income Taxes
- 123 Each of the following scenarios is independent. Assume that all cash flows are after-tax cash flows. Campbell Manufacturing is considering the purchase of a new welding system. The cash benefits will be $480,000 per year. The system costs $1,550,000 and will last 10 years. Evee Cardenas is interested in investing in a women's specialty shop. The cost of the investment is $180,000. She estimates that the return from owning her own shop will be $55,000 per year. She estimates that the shop will have a useful life of 6 years. Barker Company calculated the NPV of a project and found it to be $63,900. The project's life was estimated to be 8 years. The required rate of return used for the NPV calculation was 10%. The project was expected to produce annual after-tax cash flows of $135,000. Required: 1. Compute the NPV for Campbell Manufacturing, assuming a discount rate of 12%. If required, round all present value calculations to the nearest dollar. Use the minus sign to indicate a…arrow_forwardD4) Bob buys a property that costs $1,000,000. The property is projected to generate NOI as follows: Year NOI 1 $100,000 2 $105,000 3 $110,000 Bob will own the property for two years. Bob will sell the property at the end of year 2 at a cap rate that is 250 basis points lower than the cap rate at which he bought the property. What is Bob’s annualized IRR for the investment in question A. 26.21% B. 14.89% C. 30.47% D. 27.78%arrow_forwardNick has been offered a unique investment opportunity. If Nick invests $10,400 today, Nick will receive $600 one year from now, $1,690 two years from now, and $12,400 ten years from now. (a) If the cost of capital is 6.7% per year, the NPV is $ SHould he take this opportunity? (b) If the cost of capital is 3.2% per year, the NPV is $ SHould he take this opportunity?arrow_forward
- 5 4. Kimberly Bishop is thinking about investing in some residential income-producing property that she can purchase for $200,000. Kimberly can either pay cash for the full amount of the property or put up $50,000 of her own money and borrow the remaining $150,000 at 5 percent interest. The property is expected to generate $30,000 per year after all expenses but before interest and income taxes. Assume that Kimberly is in the 32 percent tax bracket. Calculate her annual profit and return on investment, assuming that she (a) pays the full $200,000 from her own funds or (b) borrows $150,000 at 5 percent. Then discuss the effect, if any, of leverage on her rate of return.arrow_forwardSuppose you are 28 and married. You and your spouse file for income taxes jointly. You are in the 25% tax bracket. You are considering a few personal investment issues. Suppose you expect a significant career or family change in three years, which requires substantial initial capital commitment (e.g., starting your own business, relocating abroad, buying a house, children going to college, etc.). Which of the following seems to be the most appropriate investment strategy? a.Take a loan to buy an investment condo. b.Use your savings to buy a small number of stocks that you believe to rise in price. c.Use your savings to buy well-diversified stock mutual fund shares. d.Use your savings to buy well-diversified bond mutual fund shares.arrow_forwardElinore is asked to invest $4,900 in a friend's business with the promise that the friend will repay $5,390 in one year's time. Elinore finds her best alternative to this investment, with similar risk, is one that will pay her $5,292 in one year's time. U.S. securities of similar term offer a rate of return of 7%. What is the opportunity cost of capital in this case? O A. 9% О В. 10% С. 8% O D. 7%arrow_forward
- Vidhi is investing in some rental property in Collegeville and is investigating her income from the investment. She knows the rental revenue will increase each year, but so will the maintenance expenses. She has been able to generate the data that follows regarding this investment opportunity. Assume that all cash flows occur at the end of each year and that the purchase andsale of this property are not relevant to the study. If Vidhi’s MARR = 6% per year, what is the FW of Vidhi’s projected net income?arrow_forwardVidhi is investing in some rental property in Collegeville and is investigating her income from the investment. She knows the rental revenue will increase each year, but so will the maintenance expenses. She has been able to generate the data that follows regarding this investment opportunity. Assume that all cash flows occur at the end of each year and that the purchase and sale of this property are not relevant to the study. At 6% annual interest rate, calculate the Present Worth of the project.arrow_forwardEach of the following scenarios is independent. Assume that all cash flows are after-tax cash flows. a. Campbell Manufacturing is considering the purchase of a new welding system. The cash benefits will be $480,000 per year. The system costs $2,150,000 and will last 10 years. b. Evee Cardenas is interested in investing in a women's specialty shop. The cost of the investment is $280,000. She estimates that the return from owning her own shop will be $40,000 per year. She estimates that the shop will have a useful life of 6 years. c. Barker Company calculated the NPV of a project and found it to be $63,900. The project's life was estimated to be 8 years. The required rate of return used for the NPV calculation was 10%. The project was expected to produce annual after-tax cash flows of $135,000. Required: 1. Compute the NPV for Campbell Manufacturing, assuming a discount rate of 12%. If required, round all present value calculations to the nearest dollar. Use the minus sign to indicate a…arrow_forward
- 1) An engineer is establishing his own small company. He investment of P500,000 which he will recover in 15 years. It is estimated that his annual revenue will be P900,000 per year and his annual cost is P750 000. If the he expects to earn at least 20% of his capital, should he invest? Note: Use Rate of Return Method and Annual Worth Method.arrow_forward5. A. compounded continuously. She ultimately would like to purchase a $15000 car. How much would she Miss Kito decides to invest some of her money in an account gaining 7% interest have to invest initially to have the necessary money in 5 years? Round your answer to the nearest whole dollar. Note: For continuous compounding you can use the formula: A = Pertarrow_forwardGodoarrow_forward
- Individual Income TaxesAccountingISBN:9780357109731Author:HoffmanPublisher:CENGAGE LEARNING - CONSIGNMENT
- PFIN (with PFIN Online, 1 term (6 months) Printed...FinanceISBN:9781337117005Author:Randall Billingsley, Lawrence J. Gitman, Michael D. JoehnkPublisher:Cengage Learning
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