Berman Corporation can accept only one of two projects. The revenue and expenses for each of the projects is shown below. Which project should Berman accept if the corporation has a 10 percent cost of capital and a 34 percent marginal tax rate?
$$\begin{array} { l l r r }
& & \text { Project A } & \text { Project B } \
\text { Year 1 } & \text { Revenue } & \$ 800,000 & \$ 700,000 \
& \text { Expenses } & 525,000 & 500,000 \
\text { Year 2 } & \text { Revenue } & 600,000 & 700,000 \
& \text { Expenses } & 425,000 & 550,000
\end{array}$$

Question

Berman Corporation can accept only one of two projects. The revenue and expenses for each of the projects is shown below. Which project should Berman accept if the corporation has a 10 percent cost of capital and a 34 percent marginal tax rate?
 $$\begin{array} { l l r r } 
& & \text { Project A } & \text { Project B } \
\text { Year 1 } & \text { Revenue } & \$ 800,000 & \$ 700,000 \
& \text { Expenses } & 525,000 & 500,000 \
\text { Year 2 } & \text { Revenue } & 600,000 & 700,000 \
& \text { Expenses } & 425,000 & 550,000
\end{array}$$

Quizplus · Accepted Answer

The Answer is PV of Project A: [$275,000 x (1 - .34) x .909] + [$175,000 x (1 - .34) x .826] = $260,386.50
PV of Project B: [$200,000 x (1 - .34) x .909] + [$150,000 x (1 - .34) x .826] = $201,762
Project A should be undertaken.

Berman Corporation Can Accept Only One of Two Projects