Ashley runs a small business in Boulder, Colorado, that makes snow skis. She expects the business to grow substantially over the next three years. Because she is concerned about product liability and is planning to take the company public in year 2, she currently is considering incorporating the business. Pertinent financial data are as follows.

Ashley expects her combined Federal and state marginal income tax rate to be 35% over the three years before any profits from the business are considered. Her after-tax cost of capital is 12%.
a. Considering only this data, compute the present value of the future cash flows for the three-year period, assuming that Ashley incorporates the business and pays all after-tax income as dividends (for Ashley's dividends that qualify for the 15% rate).
b. Considering only this data, compute the present value of the future cash flows for the period, assuming that Ashley continues to operate the business as a sole proprietorship.
c. Should Ashley incorporate the business in year 1? Why or why not?

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Year 3 Year 1 Year 2 Sales revenue Tax-free interest income Deductible cash expenses Tax depreciation $150,000 5,000 30,000 25,000 $320,000 $600,000 15,000 8,000 58,000 20,000 40,000