Question

A project requires an initial investment of $100,000 and is expected to produce a cash inflow before tax of $27,300 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. (Do not round intermediate calculations. Round your answers to the nearest whole dollar amount.)

	NPV Company A Company B

b. What is the IRR of the after-tax cash flows for each company? (Do not round intermediate calculations. Enter your answers as a percent rounded to 1 decimal places.)

	IRR Company A % Company B %

Answer 1

Company A
Year	Cash Flow ($)	PV @ 10%
0	-100000	-100000
1	27300	24818.18
2	27300	22561.98
3	27300	20510.89
4	27300	18646.27
5	27300	16951.15
NAV	3488.479
	IRR =	11.3564%

Company B
Year	Cash Flow ($)	PV @ 10%
0	-100000	-100000
1	26817	24379.09
2	26817	22162.81
3	26817	20148.01
4	26817	18316.37
5	26817	16651.25
NAV	1657.529
	IRR =	10.6467%

CASH Flow for Company B
Depriciation per year is 100000/5=25000
Year	Cash flow	Less Deprication	Cash flow after dep	TAX @21%	Cash Flow After tax before dep
1	27300	25000	2300	483	26817
2	27300	25000	2300	483	26817
3	27300	25000	2300	483	26817
4	27300	25000	2300	483	26817
5	27300	25000	2300	483	26817

For any clarification comment.

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