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 $27,200 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 10%. Ignore inflation. a. Calculate project NPV for each company. b. What is the IRR of the after-tax cash flows for each company?
Solutions
Expert Solution
Company A
| NPV | 3109.40 |
| IRR | 11.21% |
Company B
| NPV | 547.34 |
| IRR | 10.24% |
WORKINGS
| Company A | Company B | |||||
| Year | Cash flows | Initial cost | Tax shield | Cash inflow | Net cash flows | |
| 0 | -100000 | -100000 | -100000 | |||
| 1 | 27200 | 21000 | 21488 | 42488 | ||
| 2 | 27200 | 21488 | 21488 | |||
| 3 | 27200 | 21488 | 21488 | |||
| 4 | 27200 | 21488 | 21488 | |||
| 5 | 27200 | 21488 | 21488 | |||
| NPV | 3109.40 | NPV | 547.34 | |||
| IRR | 11.21% | IRR | 10.24% | |||
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