The following stream of after-tax cash flows are available to you as a potential equity investor in
Question:
The cash flow in year 0 represents the initial equity investment. The positive cash flows in years 1 to 5 result from the tax shield benefits from accelerated depreciation and interest deductibility on the nonrecourse debt. The negative cash flows in years 7 to 9 are indicative of the cash flows generated in a leveraged lease after the earlier-period tax shields have been used. The positive cash flow occurring in year 10 is the result of the assets salvage value.
a. What problems would you encounter in computing the equity investors rate of return on this investment?
b. If, as a potential equity investor, you require an 8 percent after-tax rate of return on investments of this type, should you make thisinvestment?
Salvage value is the estimated book value of an asset after depreciation is complete, based on what a company expects to receive in exchange for the asset at the end of its useful life. As such, an asset’s estimated salvage value is an important...
Step by Step Answer:
Contemporary Financial Management
ISBN: 9780324289114
10th Edition
Authors: James R Mcguigan, R Charles Moyer, William J Kretlow