The effective corporate tax rate

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Reference no: EM131077880

A project requires an initial investment of $100,000 and is expected to produce a cash inflow before tax of $27,000 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 30% and can depreciate the investment for tax purposes using the five-year MACRS tax depreciation schedule. Assume the opportunity cost of capital is 10%. Ignore inflation.

a. Calculate project NPV for each company. (Negative amounts should be indicated by a minus sign.Do not round intermediate calculations. Round your answers to the nearest dollar amount.)

NPV Company A $

Company B $

b-1. What is the IRR of the after-tax cash flows for each company? (Do not round intermediate calculations. Round your answers to 2 decimal places.)

IRR Company A %

Company B %

b-2. What does comparison of the IRRs suggest is the effective corporate tax rate? (Do not round intermediate calculations. Round your answer to 1 decimal place.) Effective tax rate %

Reference no: EM131077880

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