Amanda, who is in the 32% marginal tax bracket, must decide between two investment opportunities, both...
Amanda, who is in the 32% marginal tax bracket, must decide between two investment opportunities, both of which require an initial cash outlay of $75,000 at the beginning of year 1. This investment will not yield any before-tax cash flow during the period over which Amanda will hold the investment. At the end of year 3, Amanda will be able to sell Investment B for $100,000. her $25,000 profit on the sale will be a capital gain.
Assuming a 6% discount rate and end-of-year tax payments what is the net present value
Homework Answers
Initial cash outflow in Year 1 = $75,000
Capital gain on sale in Year 3 = $25,000
Tax rate = 32%
Tax = $25000*32% = $8,000
NPV of cash flow in Year 3= ($92,000 after tax cash inflow * 0.839619)
= $ 77,245
Thus, NPV = $77,245- $75,000
=$2,245
Answer: NPV is $2,245
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