A project requires an initial investment of $100,000 and is expected to produce a cash inflow before tax of $26,000 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 8%. Ignore inflation. a. Calculate project NPV for each company. b. What is the IRR of the after-tax cash flows for each company? Complete this question by entering your answers in the tabs below. Required A Required B Calculate project NPV for each company. Note: Do not round intermediate calculations. Round your answers to the nearest whole dollar amount. Company A Company B NPV What is the IRR of the after-tax cash flows for each company? Note: Do not round intermediate calculations. Enter your answers as a percent rounded to 2 decimal places. Company A Company B IRR ୫୧ % %

A project requires an initial investment of $100,000 and is expected to produce a cash inflow before tax of $26,000 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 8%. Ignore inflation. a. Calculate project NPV for each company. b. What is the IRR of the after-tax cash flows for each company? Complete this question by entering your answers in the tabs below. Required A Required B Calculate project NPV for each company. Note: Do not round intermediate calculations. Round your answers to the nearest whole dollar amount. Company A Company B NPV What is the IRR of the after-tax cash flows for each company? Note: Do not round intermediate calculations. Enter your answers as a percent rounded to 2 decimal places. Company A Company B IRR ୫୧ % %

Essentials Of Investments

11th Edition

ISBN:9781260013924

Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Chapter1: Investments: Background And Issues

Section: Chapter Questions

Problem 1PS

See similar textbooks

Similar questions

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.) 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.)
Problem 6-29 Mutually exclusive investments and project lives As a result of improvements in product engineering, United Automation is able to sell one of its two milling machines. Both machines perform the same function but differ in age. The newer machine could be sold today for $78,500. Its operating costs are $23,800 a year, but at the end of five years, the machine will require a $18,100 overhaul (which is tax deductible). Thereafter, operating costs will be $31,900 until the machine is finally sold in year 10 for $7,850. The older machine could be sold today for $26,900. If it is kept, it will need an immediate $29,500 (tax-deductible) overhaul. Thereafter, operating costs will be $37,900 a year until the machine is finally sold in year 5 for $7,850. Both machines are fully depreciated for tax purposes. The company pays tax at 21%. Cash flows have been forecasted in real terms. The real cost of capital is 11%. a. Calculate the equivalent annual costs for selling the new machine…
A project requires an initial investment of $100,000 and is expected to produce a cash inflow before tax of $26,700 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. A. Calculate project NPV for each company. B. What is the IRR of the after-tax cash flows for each company?
*A project costs $298 at t = 0 and generates unlevered after-tax cash flows of $53 per year forever. The project's unlevered cost of capital is 11.9%. The initial cost of the project is paid for with a combination of debt and equity. Debt contributes $87 and will earn interest at 4.8% forever. (The debt is perpetual, it never matures. Assume the debt tax shield cash flows have the same risk profile as the debt cash flows. The debt is fairly priced. All of the project NPV accrues to the equity holders.) The tax rate is 15% . What is the WACC of the levered project? Give your answer in percentage to the nearest 0.1 % . correct answer: 11.6
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 a 100% bonus depreciation immediately on the investment. Suppose the opportunity cost of capital is 10%. Ignore inflation. Calculate the project NPV for each company. What is the IRR of the after-tax cash flows for each company?
A project requires an initial investment of $100,000 and is expected to produce a cash inflow before tax of $26,700 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. a. Calculate project NPV for each company. b. What is the IRR of the after-tax cash flows for each company? Complete this question by entering your answers in the tabs below. Required A Required B Calculate project NPV for each company. Note: Do not round intermediate calculations. Round your answers to the nearest whole dollar amount. Company A Company B NPV
Consider a hypothetical economy that has NO tax.ABC Ltd. is considering investing in a 2-year project which is expected to generate the followingyear-end cash flows: C1 = $110 million, C2 = $115 million. The yearly discount rate for the projectis 10%. The initial cost of the project is $200 million.(a) Compute the profit and NPV of the project. (b) Based on the answer of part (a), should the project be accepted? Explain.(c) ABC’s cut-off period is 2 years. Compute the PI and Payback of the project. Based on thesetwo methods, should ABC accept the project?(d) Write down the numerical formula for computing the IRR of this project. What is theminimum IRR value that would make this project acceptable? Explain. (e) Given the recommendations based on the four decision rules above, which project shouldABC Ltd. accept? (f) Now suppose that of the $200m initial expenditure, $50m was used for the purchase of amachine that has an estimated economic life of four years. The machine will be…
A project costs $334 at t = 0 and generates unlevered after - tax cash flows of $51 per year forever. The project's unlevered cost of capital is 9.1%. The initial cost of the project is paid for with a combination of debt and equity. Debt contributes $72 and will earn interest at 5.4% forever. (The debt is perpetual, it never matures. Assume the debt tax shield cash flows have the same risk profile as the debt cash flows. The debt is fairly priced. All of the project NPV accrues to the equity holders.) The tax rate is 27%. What is the WACC of the levered project? Give your answer in percentage to the nearest 0.1%.
Consider a project with free cash flow in one year of $139,138 or $187,005, with either outcome being equally likely. The initial investment required for the project is $110,000, and the project's cost of capital is 23%. The risk-free interest rate is 7%. (Assume no taxes or distress costs.) a. What is the NPV of this project? b. Suppose that to raise the funds for the initial investment, the project is sold to investors as an all-equity firm. The equity holders will receive the cash flows of the project in one year. How much money can be raised in this way that is, what is the initial market value of the unlevered equity? c. Suppose the initial $110,000 is instead raised by borrowing at the risk-free interest rate. What are the cash flows of the levered equity, and what is its initial value according to M&M? a. What is the NPV of this project? The NPV is $ 22578. (Round to the nearest dollar.) b. Suppose that to raise the funds for the initial investment, the project is sold to…
An investment has an installed cost of $532,800. The cash flows over the four-year life of the investment are projected to be $216,850, $233,450, $200,110, and $148,820, respectively. a. If the discount rate is zero, what is the NPV? (Do not round intermediate calculations.) b. If the discount rate is infinite, what is the NPV? (A negative answer should be indicated by a minus sign.) c. At what discount rate is the NPV just equal to zero? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) a. NPV b. NPV c. IRR Q % l
Find the modified internal rate of return (MIRR) for a proposed project costing $5,489. Assume that the appropriate cost of capital for projects of this risk level, at this company is 11.46%, and the estimated cash flows for the life of the project are found in the table below. (If you calculate an MIRR of 20.22%, please enter 20.22 - do not include the % symbol, and use at least two decimal places). Year 1 Year 2 Year 3 Year 4 Year 5 $6,100 $10,836 $9,527.1 $13,000 $7,285
An investment has an installed cost of $537,800. The cash flows over the four-year life of the investment are projected to be $212,750, $229,350, $196,010, and $144,720, respectively. a. If the discount rate is zero, what is the NPV? (Do not round intermediate calculations.) b. If the discount rate is infinite, what is the NPV? (A negative answer should be indicated by a minus sign.) c. At what discount rate is the NPV just equal to zero? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) a. NPV b. NPV c. IRR %

SEE MORE QUESTIONS

Recommended textbooks for you

Essentials Of Investments

Finance

ISBN:

9781260013924

Author:

Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:

Mcgraw-hill Education,

FUNDAMENTALS OF CORPORATE FINANCE

Finance

ISBN:

9781260013962

Author:

BREALEY

Publisher:

RENT MCG

Financial Management: Theory & Practice

Finance

ISBN:

9781337909730

Author:

Brigham

Publisher:

Cengage

Foundations Of Finance

Finance

ISBN:

9780134897264

Author:

KEOWN, Arthur J., Martin, John D., PETTY, J. William

Publisher:

Pearson,

Fundamentals of Financial Management (MindTap Cou…

Finance

ISBN:

9781337395250

Author:

Eugene F. Brigham, Joel F. Houston

Publisher:

Cengage Learning

Corporate Finance (The Mcgraw-hill/Irwin Series i…

Finance

ISBN:

9780077861759

Author:

Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Jeffrey Jaffe, Bradford D Jordan Professor

Publisher:

McGraw-Hill Education

Essentials Of Investments

Finance

ISBN:

9781260013924

Author:

Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:

Mcgraw-hill Education,

FUNDAMENTALS OF CORPORATE FINANCE

Finance

ISBN:

9781260013962

Author:

BREALEY

Publisher:

RENT MCG

Financial Management: Theory & Practice

Finance

ISBN:

9781337909730

Author:

Brigham

Publisher:

Cengage

Foundations Of Finance

Finance

ISBN:

9780134897264

Author:

KEOWN, Arthur J., Martin, John D., PETTY, J. William

Publisher:

Pearson,

Fundamentals of Financial Management (MindTap Cou…

Finance

ISBN:

9781337395250

Author:

Eugene F. Brigham, Joel F. Houston

Publisher:

Cengage Learning

Corporate Finance (The Mcgraw-hill/Irwin Series i…

Finance

ISBN:

9780077861759

Author:

Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Jeffrey Jaffe, Bradford D Jordan Professor

Publisher:

McGraw-Hill Education

SEE MORE TEXTBOOKS