A corporation with $7 million in annual taxable income is considering two alternatives: Before-Tax Cash Flow Year

Question:

A corporation with $7 million in annual taxable income is considering two alternatives:

Before-Tax Cash Flow

Year Alt. 1 Alt. 2

0 -$10,000 -$20,000

1-10 4,500 4,500

11-20 0 4,500

Both alternatives will be depreciated by straight-line depreciation assuming a l0-year depreciable life and no salvage value. Neither alternative is to be replaced at the end of its useful life. If the corporation has a minimum attractive rate of return of 10% after taxes, which alternative should it choose? Solve the problem by:

(a) Present worth analysis

(b) Annual cash flow analysis

(d) Future worth analysis

(e) Benefit-cost ratio analysis

(f) Any other method you choose

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