09730-26-1P

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a.

<SUMMARY-INTRODUCTION>

To calculate: The net present value of the project.

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<EXPLANATION>

Given Information:

Cash outflow =$20 million

Cash inflow = $3 million
Useful life is 20 years
Cost of capital is 13%

Calculations:
Note:
The spreadsheet is used to calculate NPV as it has to be calculated for 20 years.

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b.

<SUMMARY-INTRODUCTION>

To calculate: The NPV if there is 50% probability for each (imposition of tax or non-imposition
of tax)

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<EXPLANATION>

Use excel sheet to calculate NPV for cash flows after-tax and cash flows before tax separately.
Then assign the probability and calculate the total NPV as shown below:

Answer:

The company should accept the project as it is generating the positive NPV.

Note:

Using the NPV formula in excel sheet, NPV for both type of cash flows are calculated.

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