Question: Heather wants to invest 40 000 in a relatively safe venture

Heather wants to invest $40,000 in a relatively safe venture and has discovered two alternatives that would produce the following ordinary income and loss over the next three years:
She is interested in the after-tax effects of these alternatives over a three-year horizon.
Assume that:
• Heather’s investment portfolio produces sufficient passive income to offset any potential passive loss that may arise from these alternatives.
• Heather’s marginal tax rate is 25%, and her cost of capital is 6% (the present value factors are .9434, .8900, and .8396).
• Each investment alternative possesses equal growth potential and comparable financial risk.
• In the loss years for each alternative, there is no cash flow from or to the investment (i.e., the loss is due to depreciation), while in those years when the income is positive, cash flows to Heather equal the amount of the income.
Based on these facts, compute the present value of these two investment alternatives and determine which option Heather should choose.

View Solution:

Sale on SolutionInn
  • CreatedMay 25, 2015
  • Files Included
Post your question