EFFECT OF TAXES ON INVESTMENT COST. The Harris Company is considering two alternative investments. Both investments produce the same revenues each year. Assume that the tax rate applicable to revenues and expenses from these investments is 34%. The two options are as follows:

Investment 1 costs $100,000 in cash to be paid at the time of the purchase. The cost can be expensed for tax purposes evenly over 4 years (an expense of $25,000 each year for 4 years).

Investment 2 requires a cash outflow of $120,000, to be paid at the time of the purchase. The cost can be expensed for tax purposes evenly over 3 years (a $40,000 expense each year for 3 years). This investment also provides a pollution control tax credit of $12,000 in the first year.

REQUIRED:

Determine which investment requires the larger net cash outflow in the first year. Your response should incorporate the effect of the investment options on taxes.