Principles of Corporate Finance (Mcgraw-hill/Irwin Series in Finance, Insurance, and Real Estate)
Principles of Corporate Finance (Mcgraw-hill/Irwin Series in Finance, Insurance, and Real Estate)
12th Edition
ISBN: 9781259144387
Author: Richard A Brealey, Stewart C Myers, Franklin Allen
Publisher: McGraw-Hill Education
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Chapter 6, Problem 16PS

Project NPV and IRR A project requires an initial investment of $100,000 and is expected to produce a cash inflow before tax of $26,000 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 8%. Ignore inflation.

  1. a. Calculate project NPV for each company.
  2. b. What is the IRR of the after-tax cash flows for each company? Why are the IRRs for A and B the same?
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Profitability index; Author: The Finance Storyteller;https://www.youtube.com/watch?v=Md5ocNqKHq8;License: Standard Youtube License