A project requires an initial investment of $100,000 and is expected to produce a cash inflow...

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Finance

A project requires an initial investment of $100,000 and isexpected to produce a cash inflow before tax of $27,300 per yearfor five years. Company A has substantial accumulated tax lossesand is unlikely to pay taxes in the foreseeable future. Company Bpays corporate taxes at a rate of 40% and can depreciate theinvestment for tax purposes using the five-year MACRS taxdepreciation schedule. Suppose the opportunity cost of capital is10%. Ignore inflation.
a. Calculate project NPV for each company.(Negative answers should be indicated by a minussign. Do not round intermediate calculations.Round your answers to the nearest whole dollaramount.)
NPV
Company A $
Company B $
b-1. What is the IRR of the after-tax cashflows for each company? (Do not round intermediatecalculations. Enter your answers as a percent rounded to 2 decimalplaces.)
IRR
Company A $ %
Company B $ %
b-2. What does comparison of the IRRs suggestis the effective corporate tax rate? (Do not roundintermediate calculations. Enter your answer as apercent rounded to 1 decimal place.)
Effective tax rate %

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4.4 Ratings (805 Votes)

a NPVCompany A 348848Company B 827704b1 IRRCompany A 1136Company B 657b2 Effective tax See Answer

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A project requires an initial investment of $100,000 and isexpected to produce a cash inflow before tax of $27,300 per yearfor five years. Company A has substantial accumulated tax lossesand is unlikely to pay taxes in the foreseeable future. Company Bpays corporate taxes at a rate of 40% and can depreciate theinvestment for tax purposes using the five-year MACRS taxdepreciation schedule. Suppose the opportunity cost of capital is10%. Ignore inflation.a. Calculate project NPV for each company.(Negative answers should be indicated by a minussign. Do not round intermediate calculations.Round your answers to the nearest whole dollaramount.)NPVCompany A$Company B$b-1. What is the IRR of the after-tax cashflows for each company? (Do not round intermediatecalculations. Enter your answers as a percent rounded to 2 decimalplaces.)IRRCompany A$ %Company B$ %b-2. What does comparison of the IRRs suggestis the effective corporate tax rate? (Do not roundintermediate calculations. Enter your answer as apercent rounded to 1 decimal place.)Effective tax rate %