Heather wants to invest $40,000 in a relatively safe venture and has discovered two alternatives that would produce the following reportable ordinary income and loss over the next three years:

YearAlternative 1

Income (Loss)Alternative 2

Income (Loss)1($20,000)($48,000)2(28,000)32,000372,00040,000

She is interested in the after-tax effects of these alternatives over a three-year horizon. Assume that Heather's investment portfolio produces sufficient passive activity income to offset any potential passive activity loss that may arise from these alternatives, that her cost of capital is 6%, that she is in the 24% tax bracket, that each investment alternative possesses equal growth potential, and that each alternative exposes her to comparable financial risk.

In addition, assume that in the loss years for each alternative, there is no cash flow from or to the investment (i.e., the loss is due to depreciation), while in those years when the income is positive, cash flows to Heather equal the amount of the income.

a.Based on these facts, compute the present value (PV) of these two investment alternatives. Round the present value to the nearest whole number.

The present value factors at 6% are as follows: Year 1: 0.9434, Year 2: 0.8900 and Year 3: 0.8396.

Calculate Year3 Tax Cost/Benefit Alternative1

Calculate Year 2 Tax Cost/Benefit Alternative2