Peanut Co. has 2 projects in which it can invest. Project X has a $300,000 initial cost and will return $600,000 before tax in year 2. Project Y has $600,000 initial cost and will return $1,000,000 before tax in year 4. The company uses an 8 percent discount rate for project evaluation and its marginal tax rate is expected to be 34 percent in all years. Which project(s) should Peanut Co. invest in?

Question

Quizplus · Accepted Answer

Project X: $600,000 (1 - .34) (.857) - $300,000 = $39,372. Project Y: $1,000,000 (1 - .34)(.735) - $600,000 = ($114,900)

Peanut Co Has 2 Projects in Which It Can Invest