Question

A project requires an initial investment of $100,000 and is expected to produce a cash inflow before tax of $26,600 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 9%. Ignore inflation. Calculate the NPV for each company. What is the IRR of the after-tax cash flows for each company?

Answer 1

NPV =

For Company A ,

Year	0	1	2	3	4	5
Cash flow	($100,000)	$26,600	$26,600	$26,600	$26,600	$26,600
Tax		0	0	0	0	0
Net cash flow	($100,000)	$26,600	$26,600	$26,600	$26,600	$26,600
Discount rate	9%
Present Value(cash flow)	($100,000)	$24,404	$22,389	$20,540	$18,844	$17,288
NPV	$3,465
IRR	10.33%	IRR(B5:G5)

For Company B

	t = 0	t = 1	t = 2	t = 3	t = 4	t = 5	t = 6
Cash Outflow	($100,000)
Cash Inflow		26,000	26,000	26,000	26,000	26,000
Depreciation(5 year MARCS)		20,000	32,000	19,200	11,520	11,520	5,760
Taxable Income		6,000	-6,000	6,800	14,480	14,480	-5,760
Tax(@21%)		-1,260	1,260	-1,428	-3,041	-3,041	1,210
Cash Flow	($100,000)	27,260	24,740	27,428	29,041	29,041	4,550
Present Value(cash flow)	($100,000)	$25,009	$20,823	$21,179	$20,573	$18,875	$2,713
NPV	$9,173
IRR	3.04%