A project requires an initial investment of $100,000 and is expected to produce a cash inflow before tax of $27,200 per year for five years. Company A has substantial accumulated tax losses and is unlikely to pay taxes in the foreseeable future. Company B pays corporate taxes at a rate of 35% and can depreciate the investment for tax purposes using the five-year MACRS tax depreciation schedule. Suppose the opportunity cost of capital is 10%. Ignore inflation.

a. Calculate project NPV for each company.

b-1.What is the IRR of the after-tax cash flows for each company?

b-2.What does comparison of the IRRs suggest is the effective corporate tax rate?