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Taxes are costs, and, therefore, changes in tax rates can affect consumer prices, project lives, and the value of existing �rms. Evaluate the change in taxation on the valuation of the following project:
0 1 2 3
1.Initial investment 100
2.revenues 100 100 100
3.cash operating costs 50 50 50
4.tax depreciation 33.33 33.33 33.33
5.income pretax 16.67 16.67 16.67
6.tax at 40% 6.67 6.67 6.67
7.net income 10 10 10
8. after -tax salvage 15
9. cash �ow (7+8+4-1) -100 43.33 43.33 58.33
NPV at 20%=0
Assumptions: Tax depreciation is straight-line over three years. Pre-tax salvage value is 25 in year 3 and 50 if the asset is scrapped in year 2. Tax on salvage value is 40% of the difference between salvage value and book value of the investment. The cost of capital is 20%.
�� Please verify that the information given above yields NPV = 0. �� If you decide to terminate the project in year two (2) what would be the NPV of the project? �� Suppose that the government now changes tax depreciation to allow a 100% write-off in year one (1). How
does this affect your answers to parts a and b above? �� Would it now make sense to terminate the project after two rather than three years? �� How would your answers change if the corporate income tax were abolished entirely
Please show the detailed process
Anonymous answered this 918 answers
We can calculate the desired results as follows:
A) NPV of the Project at 20% Cost of Capital is :
Question: Taxes are costs, and, therefore, changes in tax rates can affect
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2021/5/23 Taxes Are Costs, And, Therefore, Changes In Tax Ra... | Chegg.com
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Formulas used are:
So, the NPV is $ 0
B) If the Project is terminated in 2nd year, the NPV comes out to be:
After Tax salvage Value after 2 years = (Sale Value - Book Value) * ( 1 - 40% )
= ( 50 - 33.33 ) * 0.60
= 16.67 * 0.60
= $ 10
NPV of the Project at 20% Cost of Capital if the Project is terminated at 2nd year is:
Formulas used are:
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2021/5/23 Taxes Are Costs, And, Therefore, Changes In Tax Ra... | Chegg.com
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So, the NPV is $ -26.90
C) If the government now changes tax depreciation to allow a 100% write-off in year one, then the cash �ows for the years will be as follows
0 1 2 3
1.Initial investment -100
2.revenues 100 100 100
3.cash operating costs 50 50 50
4.tax depreciation 100 0 0
5.income pretax -50 50 50
6.tax at 40% -20 20 20
7.net income ( 5 - 6 ) -30 30 30
8. after -tax salvage 15
9. cash �ow (7+8+4-1) -100 70 30 45
The NPV is :
Formulas used are:
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2021/5/23 Taxes Are Costs, And, Therefore, Changes In Tax Ra... | Chegg.com
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So, the NPV is $ 5.20
C ii) If the Project is terminated in 2nd year, the NPV comes out to be:
After Tax salvage Value after 2 years = (Sale Value - Book Value) * ( 1 - 40% )
= ( 50 - 0 ) * 0.60
= 50 * 0.60
= $ 30
So, the NPV is $ 0.00
Formulas used are:
As there are multiple questions asked, I have solved the �rst 4 sub parts. Please post the question separately for rest parts to be answered. Hope it helps you !!
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Q: Taxes are costs, and, therefore, changes in tax rates can affect consumer prices, project lives, and the value of existing �rms. Evaluate the change in taxation on the valuation of the following project: 0 1 2 3 1.Initial Investment 100 2. Revenues 100 100 100 3. Cash operating costs 50 50 50 4. Tax depreciation 33.33 33.33 33.33...
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Q: Taxes are costs, and, therefore, changes in tax rates can affect consumer prices, project lives, and the value of existing �rms. Evaluate the change in taxation on the valuation of the following project: 0 1 2 3 1.Initial investment 100 2.revenues 100 100 100 3.cash operating costs 50 50 50 4.tax depreciation 33.33 33.3...
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