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Corporation VB was formed in 2018. Immediately prior to year end, VB is considering a $500,000 deductible expenditure. It can either make the expenditure before

Corporation VB was formed in 2018. Immediately prior to year end, VB is considering a $500,000 deductible expenditure. It can either make the expenditure before the end of 2018, or wait until 2019. However, if it waits the cost of the expenditure will increase to $525,000. Before considering this expenditure, VB has the following projected pre-tax cash flows and taxable income for 2018, 2019, and 2020. Use Appendix A.

2018 2019 2020
Taxable income and pre-tax cashflow $ 120,000 $ 400,000 $ 700,000

Using a 5 percent discount rate, compute the NPV of VB's after-tax cashflows if the expenditure is in 2018.

Using a 5 percent discount rate, compute the NPV of VB's after-tax cashflows if the expenditure is in 2019.

Based on your calculations, when should VB make this expenditure?

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