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

question 7

Multiple Choice

A project requires an initial investment of $200,000 and is expected to produce a cash flow before taxes of 120,000 per year for two years. [i.e. cash flows will occur at t = 1 and t =
2]) The corporate tax rate is 30%. The assets will be depreciated using MACRS - 3 year schedule: (t=1, 33%) ; (t = 2: 45%) ; (t = 3: 15%) ; (t = 4: 7%) . The company's tax situation is such that it can make use of all applicable tax shields. The opportunity cost of capital is 12%. Assume that the asset can be sold for book value. Calculate the NPV of the project: (Approximately)

• A) $22,463
• B) $19,315
• C) $16,244
• D) None of the above

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