Your opportunity cost of capital is determined by the tax-exempt bond, because 66.67% . 20% < 15%.
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Your opportunity cost of capital is determined by the tax-exempt bond, because 66.67% . 20% < 15%.
Your project’s $2,000 will turn into 66.67% . $2,000 ≈ $1,334 after-tax earnings, or $13,334 after-tax cash flow. Therefore, your NPV is −$12,000 + $13,334/(1 + 15%) ≈ −$405.22. Check: The after-tax rate of return of the project’s cash flow is $13,334/$12,000 − 1 ≈ 11.11%. This is less than 15%. You are better off investing in tax-exempt bonds.
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