The Long-Term Financing Company has identified an alternative project that is si

Question

The Long-Term Financing Company has identified an alternative project that is similar to a project currently under consideration in all respects except one. That is, the new project will reduce the need for working capital by $10,000 during the 30-year life of the project. The cost of capital is 18 percent, and the marginal corporate tax rate for the firm is 34 percent.

What is the after-tax present value of this new alternative project? (Round answer to 2 decimal places, e.g. 15.25.)

After-tax present value of new alternative project $________________

After-tax present value of new alternative project $________________

Explanation / Answer

Answer:

The Working Capital doesn’t effect the Income Statement of the Company. So, there is no Tax effect on both the Working Capital invested and the amount i.e. Working Capital that will be received back, if any invested at the end of the project. The after tax Present Value will include adjustment for Working capital Investment and amount to be received back at the end of the project.

After-Tax present Value = $10,000 - $10,000 / (1.18)^30
After-Tax present Value = $10,000 - $10,000 * 0.006975
After-Tax present Value = $9,930.25

Related Questions

Navigate

• Browse (All)
• Browse T
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.