Amanda, who is in the 32% marginal tax bracket, must decide between two investment opportunities, both...
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Amanda, who is in the 32% marginal tax bracket, must decidebetween two investment opportunities, both of which require aninitial cash outlay of $150,000 at the beginning of year 1.Investment A: This investment will yield $25,500 before-tax cashflow at the end of years 1, 2 and 3. This cash represents ordinarytaxable income. At the end of year 3, Amanda can liquidate theinvestment and recover her $150,000 cash outlay. She must pay anondeductible (for tax purposes) $750 annual fee at the end ofyears 1, 2, and 3 to maintain Investment A. Investment B: Thisinvestment will not yield any before-tax cash flow during theperiod over which Amanda will hold the investment. At the end ofyear 3, Amanda will be able to sell Investment B for $215,000 cash.Her $65,000 profit on the sale will be a capital gain. Required:Assuming a 6% discount rate and end-of-year tax payments, determinewhich investment has the greater net present value.
Amanda, who is in the 32% marginal tax bracket, must decidebetween two investment opportunities, both of which require aninitial cash outlay of $150,000 at the beginning of year 1.Investment A: This investment will yield $25,500 before-tax cashflow at the end of years 1, 2 and 3. This cash represents ordinarytaxable income. At the end of year 3, Amanda can liquidate theinvestment and recover her $150,000 cash outlay. She must pay anondeductible (for tax purposes) $750 annual fee at the end ofyears 1, 2, and 3 to maintain Investment A. Investment B: Thisinvestment will not yield any before-tax cash flow during theperiod over which Amanda will hold the investment. At the end ofyear 3, Amanda will be able to sell Investment B for $215,000 cash.Her $65,000 profit on the sale will be a capital gain. Required:Assuming a 6% discount rate and end-of-year tax payments, determinewhich investment has the greater net present value.
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