Question
In: Finance
A project requires an initial investment of $100,000 and is expected to produce a cash inflow...
A project requires an initial investment of $100,000 and is expected to produce a cash inflow before tax of $28,000 per year for five years. Company A has substantial accumulated tax losses and is unlikely to pay taxes in the foreseeable future. Company B pays corporate taxes at a rate of 21% and can claim 100% bonus depreciation on the investment. Suppose the opportunity cost of capital is 11%. Ignore inflation & do not rely on MACRS.
a. Calculate project NPV for each company.
b. What is the IRR of the after-tax cash flows for each company?
Solutions
Expert Solution
a: NPV of company A = 3485.12
Company B = 2753.24
b: IRR of company A = 12.38%
Company B = 12.38%
| Company A | |
| Year | Cash flows |
| 0 | -100000 |
| 1 | 28000 |
| 2 | 28000 |
| 3 | 28000 |
| 4 | 28000 |
| 5 | 28000 |
| NPV | 3485.12 |
| IRR | 12.38% |
| Company B | |||
| Year | Initial cost after tax | Cash inflow after tax | Net CF |
| 0 | -79000 | -79000 | |
| 1 | 22120 | 22120 | |
| 2 | 22120 | 22120 | |
| 3 | 22120 | 22120 | |
| 4 | 22120 | 22120 | |
| 5 | 22120 | 22120 | |
| NPV | 2753.24 | ||
| IRR | 12.38% | ||
WORKINGS
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