A project requires an initial investment of $100,000 and is expected to produce a cash inflow before tax of $28,000 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 11%. Ignore inflation.

A project requires an initial investment of $100,000 and is expected to produce a cash inflow before tax of $28,000 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 11%. Ignore inflation. a. Calculate project NPV for each company. (Negative answers should be indicated by a minus sign. Do not round intermediate calculations. Round your answers to the nearest whole dollar amount.) Company A Company B $ $ NPV 3485 -6298 b-1. What is the IRR of the after-tax cash flows for each company? (Do not round intermediate calculations. Enter your answers as a percent rounded to 2 decimal places.) IRR 12.38 % $ Company A Company B b-2. What does comparison of the IRRs suggest is the effective corporate tax rate? (Do not round intermediate calculations. Enter your answer as a percent rounded to 1 decimal place.) Effective tax rate A project requires an initial investment of $100,000 and is expected to produce a cash inflow before tax of $28,000 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 11%. Ignore inflation. a. Calculate project NPV for each company. (Negative answers should be indicated by a minus sign. Do not round intermediate calculations. Round your answers to the nearest whole dollar amount.) Company A Company B $ $ NPV 3485 -6298 b-1. What is the IRR of the after-tax cash flows for each company? (Do not round intermediate calculations. Enter your answers as a percent rounded to 2 decimal places.) IRR 12.38 % $ Company A Company B b-2. What does comparison of the IRRs suggest is the effective corporate tax rate? (Do not round intermediate calculations. Enter your answer as a percent rounded to 1 decimal place.) Effective tax rate