Question
A project requires an initial investment of $100,000 and is expected to produce a cash inflow before tax of $27,300 per year for five years.
A project requires an initial investment of $100,000 and is expected to produce a cash inflow before tax of $27,300 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 40% and can depreciate the investment for tax purposes using the five-year MACRS tax depreciation schedule. Assume the opportunity cost of capital is 10%. Ignore inflation. |
a. | Calculate project NPV for each company. (Negative amounts should be indicated by a minus sign.Do not round intermediate calculations.Round your answers to the nearest dollar amount.) |
NPV | |
Company A | $ |
Company B | $ |
b-1. | What is the IRR of the after-tax cash flows for each company? (Do not round intermediate calculations. Round your answers to 2 decimal places.) |
IRR | |
Company A | % |
Company B | % |
b-2. | What does comparison of the IRRs suggest is the effective corporate tax rate? (Do not round intermediate calculations. Round your answer to 1 decimal place.) |
Effective tax rate | % |
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