Problem
Suppose an asset has a first cost of $6000, a life of 5 years, a salvage value of $2000 at the end of 5 years, and a net annual before-tax revenue of $1500. The firm's marginal tax rate is 35%. The asset will be classified as class 8 property with d = 20%. (a) Using the generalized cash flow approach, determine the cash flow after taxes. (b) Rework part (a) assuming that the entire investment would be financed by a bank loan at an interest rate of 9%. (c) Given a choice between the financing methods of parts (a) and (b), show calculations to justify your choice of which is the better one at a discount rate of 9%.