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

jeff jeffy answered 1 month ago

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