Parrino, Essentials of Corporate Finance, 1e Help I System Announcements PRINTER

Question

Parrino, Essentials of Corporate Finance, 1e Help I System Announcements PRINTER VERSION BACK NEXT Sample Test Problem 10.4 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 $ Click if you would like to Show Work for this question: Open Show Work

Explanation / Answer

Working capital has no impact on income statement of firm and hence there is no effect of tax on the value associated with working capital difference.

Therefore,

after tax present value = 10000 - [10000 * (1 + 18%)-30 ] = 10000 - 69.7493 = 9,930.25--> Answer

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