Firm D is considering investing $640,000 cash in a three-year project with the following cash flows. Use Appendix A and Appendix B. Investment/return of investment Revenues Expenses Before-tax net cash flow Year o Year 1 $(640,000) $ 0 128,000 98,000 (38,400) (38,400) $(550,400) $ 59,600 Year 2 $640,000 68,000 (20,400) $687,600 Required: a-1. The revenue is taxable, the expenses are deductible, and the marginal tax rate is 15 percent. Use a 10 percent discount rate to compute NPV. a-2. Should firm D make the investment? b-1. The revenue is taxable, the expenses are deductible, and the marginal tax rate is 40 percent. Use a 10 percent discount rate to compute NPV. b-2. Should firm D make the investment? c-1. The revenue is taxable, only one-half of the expenses are deductible, and the marginal tax rate is 15 percent. Use a 10 percent discount rate to compute NPV. c-2. Should firm D make the investment? d-1. Firm D can deduct the expenses in the year paid (against other sources of income) but can defer recognizing the $294,000 total income until year 2. (It will collect the revenues as indicated in years 0, 1, and 2 so that before-tax cash flows don't change.) The marginal tax rate is 40 percent. Use a 10 percent discount rate to compute NPV. d-2. Should firm D make the investment? The revenue is taxable, the expenses are deductible, and the marginal tax rate is 15 percent. Use a 10 percent discount rate to compute NPV. (Deductions and Cash Outflows should be entered with a minus sign. Round discount factor(s) to 3 decimal places, all other intermediate calculations and final answers to the nearest whole dollar amount.) Year Year 1 Year 2 Taxable Revenue Deductions Taxable income (Tax/Tax Savings on Income (15%) Before-tax cashflow (Tax)/Tax Savings After-tax net cash flow Discount factor (10%) Present Value en 0 IS 0 S 0 IS 0 0 0 NPV The revenue is taxable, the expenses are deductible, and the marginal tax rate is 40 percent. Use a 10 percent discount rate to compute NPV. (Deductions and Cash Outflows should be entered with a minus sign. Round discount factor(s) to 3 decimal places, all other intermediate calculations and final answers to the nearest whole dollar amount.) Year o Year 1 Year 2 Taxable Revenue Deductions Taxable income (Tax)/Tax Savings on Income (40%) 0 0 0 Before-tax cashflow (Tax)/Tax Savings After-tax net cash flow Discount Factor (10%) Present Value NPV IS 0 S 0 S 0 The revenue is taxable, only one-half of the expenses are deductible, and the marginal tax rate is 15 percent. Use a 10 percent discount rate to compute NPV. (Deductions and Cash Outflows should be entered with a minus sign. Round discount factor(s) to 3 decimal places, all other intermediate calculations and final answers to the nearest whole dollar amount.) Year 0 Year 1 Year 2 Taxable Revenue Deductions Taxable income (Tax)/Tax Savings on Income (15%) S 0 S 0 S 0 Before-tax cashflow (Tax/Tax Savings After-tax net cash flow Discount factor (10%) Present Value NPV S 0 S 0 S 0 Firm D can deduct the expenses in the year paid (against other sources of income) but can defer recognizing the $294,000 total income until year 2. (It will collect the revenues as indicated in years 0, 1, and 2 so that before-tax cash flows don't change.) The marginal tax rate is 40 percent. Use a 10 percent discount rate to compute NPV. (Deductions and Cash Outflows should be entered with a minus sign. Round discount factor(s) to 3 decimal places, all other intermediate calculations and final answers to the nearest whole dollar amount.) Show less Year o Year 1 Year 2 Taxable Revenue Deductions Taxable income(loss) (Tax/Tax Savings on Income (40%) Before-tax cashflow (Taxy/Tax Savings After-tax cashflow Discount factor (10%) Present Value 0 0 0 0 S 0 S 0 NPV
