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 $28,000 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 21% and can claim 100% bonusdepreciation on the investment. Suppose the opportunity cost ofcapital is 11%. Ignore inflation & do not relyon MACRS.
a. Calculate project NPV for each company.
b. What is the IRR of the after-tax cash flowsfor each company?

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4.1 Ratings (506 Votes)

a NPV of company A 348512Company B 275324b IRR of company A 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 $28,000 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 21% and can claim 100% bonusdepreciation on the investment. Suppose the opportunity cost ofcapital is 11%. Ignore inflation & do not relyon MACRS.a. Calculate project NPV for each company.b. What is the IRR of the after-tax cash flowsfor each company?