Firm Z, a corporation with a 21 percent tax rate, has $100,000 to invest in year 0

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Firm Z, a corporation with a 21 percent tax rate, has $100,000 to invest in year 0 and two investment choices. Investment 1 will generate $12,000 taxable cash flow annually for years 1 through 5. In year 5, the firm can sell the investment for $100,000. Investment 2 will not generate any taxable income or cash flow in years 1 through 5, but in year 5, the firm can sell Investment 2 for $165,000.

a. Assuming a 6 percent discount rate, which investment has the greater NPV?

b. Would your answer change if Firm Z were a non corporate taxpayer with a 35 percent tax rate and the gain on sale of Investment 2 were eligible for the 15 percent capital gains rate?

Corporation
A Corporation is a legal form of business that is separate from its owner. In other words, a corporation is a business or organization formed by a group of people, and its right and liabilities separate from those of the individuals involved. It may...
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Principles Of Taxation For Business And Investment Planning 2019 Edition

ISBN: 9781260161472

22nd Edition

Authors: Sally Jones, Shelley C. Rhoades Catanach, Sandra R Callaghan

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