■Davey plans to invest $15,000 in corporate stock in 2020. He does not expect the stock...
■Davey plans to invest $15,000 in corporate stock in 2020. He does not expect the stock to pay dividends, and he expects to sell the stock in 2028 when he projects it will be worth $29,000. If the gain on this investment is taxed at the 15% preferential capital gains rate, and using a discount rate of 7%, what is the NPV of Davey’s cash flows from this investment? What if the gain is taxed at his ordinary tax rate of 35% instead?
Homework Answers
Gain on Investment = 29000-15000 = $14000
Tax = 14000*15% = $2100
After tax sale proceeds = 29000-2100 = $26900
NPV = Present value of cash inflows - Present value of cash outflows
= 26900*PVF(7%, 8 years) - 15000
= 26900*0.582 - 15000
= $655.8
Gain = $14000
Tax = 14000*35% = $4900
After tax proceeds = 29000-4900 = $24100
NPV = 24100*0.582 - 15000
= -$973.8
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