Reference no: EM131767259
Question - Amos, who is in the 33% marginal tax bracket, must decide between two investment opportunities, both of which require an initial cash outlay of $200,000 at the beginning of year 1.
Investment A: This investment will yield $35,000 before-tax cash flow at the end of years 1, 2 and 3. This cash represents ordinary taxable income. At the end of year 3, Amos can liquidate the investment and recover his $200,000 cash outlay. He must pay a nondeductible (for tax purposes) $500 annual fee at the end of years 1, 2, and 3 to maintain Investment A.
Investment B: This investment will not yield any before-tax cash flow during the period over which Amos will hold the investment. At the end of year 3, Amos will be able to sell Investment B for $290,000 cash. His $90,000 profit on the sale will be a capital gain.
Required: Assuming a 6% discount rate and end-of-year tax payments, determine which investment has the greater net present value.