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 5 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 35% and can depreciate the investment for tax purposes using the 5 year MACRS tax depreciation schedule. Suppose the opportunity cost of capital is 8%. Ignore inflation.
1. Calculate project NPV for each company.
Your tutorial is in Excel, attached. Click in cells to see computations. I have ...
Your tutorial is in Excel, attached. Click in cells to see computations. I have created two scenarios, one with "no tax" and one "taxed." I used the mid-year convention for MACRS depreciation to figure the tax benefit of the depreciation tax shield. I have two ways to show you the effective tax rate, a visual way and an arithmetic way.