Reference no: EM132857019

Question - Helen is deciding between two investments. Both investments will require an initial cash outlay of $60,000 at the beginning of year 1.

Investment A will yield $9,000 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, Helen can liquidate the investment and recover his $60,000 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 will not yield any before-tax cash flow during the period over which Helen will hold the investment. However, at the end of year 3, Helen will be able to sell Investment B for $82,000 cash. His $22,000 profit on the sale will be a capital gain.

Required - Assume Helen is in the 32% marginal tax bracket, a 6% discount rate, and end-of-year tax payments. Determine which investment has the greater net present value.