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Because corporations have an indefinite life their cash flows are often evaluated as perpetuities. Suppose you are considering an investment in Corporation A or Corporation
Because corporations have an indefinite life their cash flows are often evaluated as perpetuities. Suppose you are considering an investment in Corporation A or Corporation B -- they are mutually exclusive. A. Corporation Arequires an initial investment of $600,000. You expect it to provide a $60,000 after-tax cash flow in one year that will grow at an annual rate of 5% forever. B. Corporation B requires an initial investment of only $400,000 and you expect it to provide a steady, non-growing annual cash flow of $75,000 after income taxes. Your required after-tax minimum acceptable rate of return (MARR) is 10%. Required: a. What is the Net Present Value (NPV) of making an investment in Corporation A and in Corporation B? b. Determine the Equivalent Uniform Annual Benefit (EUAB) of an investment in Corporation A and in Corporation B (label them). c. Determine the Internal Rate of Return (IRR) on an investment in each corporation (label them). What investment would you make if you only looked at the IRR's and nothing else? d. At what required MARR would you be indifferent between making an investment in either Corporation A or Corporation B (to two decimal places)? e. For what range of MARR's is Corporation A the better investment, Corporation B the better investment or neither of them a good investment? f. Keeping everything else the same, at what annual growth rate for Corporation A's cash flows would you be indifferent between investing in either Corporation
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