Beta Corporation pay a 40% tax rate. A new $3 million investment will generate after-tax cash flows of $1 million a year for 4 years if the company uses no debt. The company will, however, use debt equal to 60% of the present value of future cash flows. Pre-tax interest on debt is 10%, and stockholders require a 16% return on their investment.

a. Compute the net present value of the capital investment using a weighted average cost of capital

b. Compute the net present value of the cash flows to and from shareholders using the shareholders required return5-11.

A $1 million capital investment will generate cash flows of $700,000 at the end of each year for 2 years, after which it will be worthless.

a. Compute the net present value using a 10% required return

b. Assume depreciation of $600,000 the first year and $400,000 the second year, compute the economic profit for each year, and compute the present value of the economic profit.