Question
Given the following information: Nominal Initial Cost = $80,000; Nominal Before-tax Net Return = 14,000 Marginal Tax Rate = 20%; Required rate of return =
Given the following information:
Nominal Initial Cost = $80,000; Nominal Before-tax Net Return = 14,000 Marginal Tax Rate = 20%; Required rate of return = 13%
Real Terminal Value = $60,000; Investment Life = 3 years Inflation Rate = 4%; Risk Premium = 4%
Suppose that IRS will allow the investor to depreciate the investment using straight-line over 10 years.
(i) What is the after-tax, risk adjusted discount rate?
a. 13.2% b. 12%
c.15% d.13.728%
(ii) What is the nominal after-tax net return at the end of year 2?
a. $12,648 b. $12,113.92
c. $12,598.48 d.$12,248
(iii) What is the annual tax saving? a. $1,600 b. $1,000 c. $1,333.33 d. $1,533.33
(iv) What is the nominal after-tax terminal value?
a. $61,120 b. $65,193.47
c. $75,200 d. $72,929.69
(v) What is the present value of the nominal after-tax terminal value? a.$42,135.10 b. $51,831.62 c. $44,943.29 d. $50,276.51
(vi) What is the NPV of this investment? a.-$2,331 b.-$2,863 c. $2,331 d. $2,863
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