Question:
Items 1 and 2 are based on the following information:
Assume that Straper Industries is considering investing in a project with the following characteristics:
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Initial investment
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$500,000
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|
Additional investment in working capital
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10,000
|
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Cash flows before income taxes for years 1 through 5
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140,000
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|
Yearly tax depreciation
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90,000
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Terminal value of investment
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50,000
|
|
Cost of capital
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10%
|
|
Present value of $1 received after 5 years discounted at 10%
|
.621
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Present value of an ordinary annuity of $1 for 5 years at 10%
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3.791
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Marginal tax rate
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30%
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Investment life
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5 years
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Assume that all cash flows come at the end of the year.
What is the amount of the after-tax cash flows in year 2?
1. $140,000
2. $125,000
3. $ 98,000
4. $ 70,000
What is the net present value of the investment?
1. $175,000
2. $ 58,000
3. $ 1,135
4. $ (12,340)