Question
Thompson Company is calculating the NPV of a five year investment in machinery. The required rate of return for their investment is 11% and the
Thompson Company is calculating the NPV of a five year investment in machinery. The required rate of return for their investment is 11% and the tax rate rate is 40%. How should their NPV evaluation of today through year 5 treat the $50,000 of working capital necessary for the investment?
a.
Show a cash outflow of $50,000 today and a cash inflow of $50,000 in year 5
b.
Show a cash inflow of $50,000 today and cash outflow of $50,000 in years 1 - 5
c.
Multiply $50,000 by the income tax rate of 40% and show that amount as tax savings today
d.
Multiply $50,000 by the present value factor associated with a five year investment at 11% and show that amount as a cash outflow today
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