Consider the following investment opportunity. Initial cost at time 0 .................................................... $15 million Annual revenues beginning at

Question:

Consider the following investment opportunity.
Initial cost at time 0 .................................................... $15 million
Annual revenues beginning at time 1 ............................... $20 million
Annual operating costs exclusive of depreciation ................ $13 million
Expected life of investment .......................................... 5 years
after taxes ............................................... $0
Annual depreciation for tax purposes ................................. $3 million
Tax rate .................................................................. 40%
What is the rate of return on this investment? Assuming the investor wants to earn at least 10 percent after corporate taxes, is this investment attractive?
Salvage Value
Salvage value is the estimated book value of an asset after depreciation is complete, based on what a company expects to receive in exchange for the asset at the end of its useful life. As such, an asset’s estimated salvage value is an important...