In: Finance
Investor W has the opportunity to invest $615,000 in a new venture. The projected cash flows from the venture are as follows. Use Appendix A and Appendix B.
Year 0 | Year 1 | Year 2 | Year 3 | Year 4 | ||||||
Initial investment | $ | (615,000) | ||||||||
Taxable revenue | $ | 81,500 | $ | 76,500 | $ | 66,500 | $ | 61,500 | ||
Deductible expenses | (18,000) | (18,000) | (21,500) | (21,500) | ||||||
Return of investment | 615,000 | |||||||||
Before-tax net cash flow | $ | (615,000) | $ | 63,500 | $ | 58,500 | $ | 45,000 | $ | 655,000 |
Investor W uses a 7 percent discount rate.
a-1. Complete the table below to calculate NPV. Assume her marginal tax rate over the life of the investment is 15 percent.
a-2. Should Investor W make the investment?
b-1. Complete the table below to calculate NPV. Assume her marginal tax rate over the life of the investment is 20 percent.
b-2. Should Investor W make the investment?
c-1. Complete the table below to calculate NPV. Assume her marginal tax rate in years 1 and 2 is 10 percent and in years 3 and 4 is 25 percent.
c-2. Should Investor W make the investment?