Suppose a firm has 300000 available for investment. Two possible alternatives Al and A2 have...
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Suppose a firm has 300000 available for investment. Two possible alternatives Al and A2 have been suggested and they are considered to be mutually exclusive. Alternative Al requires straight line depreciation method, while A2 requires the DDB method of depreciation. The lives of these alternatives are 5 years and the estimated salvage value is zero. The effective tax rate is 40% and the MARR before taxes is considered to be 15%. The before tax cash flows for both alternatives are shown below: End of year BTCF A1 BTCF A2 -300000-300000 100000 130000 100000 80000 3 100000 90000 125000 110000 125000 140000 0 1 2 4 5 a. What is the most desirable alternative based on after tax cash flow? Use the PW method. b. Determine the after tax rate of return for both alternatives
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