Question
A corporation with $7 million in annual taxable income is considering two alternatives. Before-Tax Cash Flow ($1000) Year Alt. 1 Alt. 2 0 -$10,000 -$20,000
A corporation with $7 million in annual taxable income is considering two alternatives.
Before-Tax Cash Flow ($1000)
Year | Alt. 1 | Alt. 2 |
0 | -$10,000 | -$20,000 |
1-10 | 4500 | 4,500 |
11-20 | 0 | 4,500 |
Both alternatives will be depreciated by straight-line depreciation assuming a 10-year depreciable life and no salvage value. Neither alternative will be replaced at the end of its useful life. If the corporation has a minimum attractive rate of return of 10% after taxes, which alternative should it choose? Solve the problem by:
(a) Present worth analysis
(b) Annual cash flow analysis
(c) Rate of return analysis
(d) Future worth analysis
(e) Benefit-cost ratio analysis
Hints:
You are asked to solve this using MARR = 10% BEFORE taxes
IGNORE: Taxable Income, depreciation
DON'T IGNORE: Salvage = 0, Neither alternative will be replaced at the end of its life.
Alternative 1 | Alternative 2 | Increment Alternative 2-1 | |
---|---|---|---|
a) P = | |||
b) A = | |||
c) IRR = | |||
d) F = | |||
e) B-C = |
Which alternative did you select? Explain.
**Can not use excel functions; Please show work/explain how to achieve results**
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