1. Mr. Hewitt is deciding between two investment opportunities: Investment A and Investment B. Both investments will require an initial nondeductible cash outlay of $100,000 in 2020 (the current year). Other relevant details on each investment are as follows:

   • Investment A will provide Mr. Hewitt with annual pretax income of $14,000 in each of the following three years: 2021, 2022, and 2023. This income will be taxable to Mr. Hewitt at his ordinary income tax rate of 35%. Mr. Hewitt can then recover his initial investment of $100,000 in 2023 tax-free. Mr. Hewitt must also pay a non-deductible investment advisory fee of $500 per year in 2021, 2022, and 2023 to maintain Investment A.

   • Investment B will not provide any annual income to Mr. Hewitt after he makes his initial investment. However, Mr. Hewitt can sell Investment B in 2023 for $130,000. Any gain on this sale will be taxed at Mr. Hewitt’s long-term capital gains tax rate of 15%.

     Assuming a discount rate of 7%, which investment maximizes the NPV of Mr. Hewitt’s post-tax investment income – and by how much? Support your answer with clearly labeled calculations.

Answer rating: 100% (QA)

To determine which investment maximizes the Net Present Value NPV of Mr Hewitts posttax investment i... View the full answer