Taxes are costs, and, therefore, changes in tax rates can affect consumer prices, project lives, and the value of existing firms. Evaluate the change in taxation on the valuation of the following project:

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1 2 3 1. Initial investment 2. Revenues 3. Cash operating costs 4. Tax depreciation 5. Income pretax 6. Tax at 40% 7. Net income 100 100 100 100 50 50 50 33.33 33.33 33.33 16.67 16.67 16.67 6.67 6.67 6.67 10 10 10 8. After-tax salvage 15 9. Cash flow (7+8+4-1) -100 +43.33 +43.33 +58.33 NPV at 20% = 0 1 2 3 1. Initial investment 2. Revenues 3. Cash operating costs 4. Tax depreciation 5. Income pretax 6. Tax at 40% 7. Net income 100 100 100 100 50 50 50 33.33 33.33 33.33 16.67 16.67 16.67 6.67 6.67 6.67 10 10 10 8. After-tax salvage 15 9. Cash flow (7+8+4-1) -100 +43.33 +43.33 +58.33 NPV at 20% = 0

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The change in taxation can indeed impact the valuation of the project Heres how the change in taxation can affect the projects valuation 1 Impact on C... View the full answer