A Project Requires an Initial Investment of $200,000 and Expects

question 22

Multiple Choice

A project requires an initial investment of $200,000 and expects to produce a cash flow before taxes of $120,000 per year for two years . The corporate tax rate is 21 percent. The assets will depreciate using the MACRS year 3 schedule: (t = 1: 33%) ; (t = 2: 45%) ; (t = 3: 15%) ; (t = 4: 7%) . The company's tax situation is such that it can use all applicable tax shields. The opportunity cost of capital is 11 percent. Assume that the asset can sell for book value at the end of the project. Calculate the approximate IRR for the project.

• A)12.00 percent
• B)11.00 percent
• C)20.02 percent
• D)14.06 percent

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Definitions:

Ability-To-Pay Principle

The idea that taxes should be levied on a person according to how well that person can shoulder the burden

Government Services

Various forms of services provided to the public by the government, which can include education, healthcare, security, and infrastructure.

Similar Incomes

The scenario in which two or more entities earn incomes that are close in magnitude.

Progressive

A term often used to describe a tax system in which the tax rate increases as the taxable amount or income increases.