Firm D is considering investing $648,000 cash in a three-year project with the following cash flows. Use Appendix A and Appendix B.

	Year 0	Year 1	Year 2
Investment/return of investment	$ (648,000)	$ 0	$ 648,000
Revenues	129,600	95,600	55,600
Expenses	(38,880)	(38,880)	(16,680)
Before-tax net cash flow	$ (557,280)	$ 56,720	$ 686,920

Required:

1. 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.
2. a-2. Should firm D make the investment?
3. 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.
4. b-2. Should firm D make the investment?
5. 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.
6. c-2. Should firm D make the investment?
7. d-1. Firm D can deduct the expenses in the year paid (against other sources of income) but can defer recognizing the $280,800 total income until year 2. (It will collect the revenues as indicated in years 0, 1, and 2 so that before-tax cash flows dont change.) The marginal tax rate is 40 percent. Use a 10 percent discount rate to compute NPV.
8. d-2. Should firm D make the investment?

APPENDIXA Present Value of $1 Periods 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 3% .971 .943 .915 .888 .863 .837 .813 .789 .766 .744 .722 .701 .681 .661 .642 .623 .605 .587 .570 .554 4% .962 .925 .889 .855 .822 .790 .760 .731 .703 .676 .650 .625 .601 .577 .555 .534 .513 .494 .475 .456 5% .952 .907 .864 .823 .784 .746 .711 .677 .645 .614 .585 .557 .530 .505 .481 .458 436 .416 .396 .377 6% .943 .890 .840 .792 .747 .705 .665 .627 .592 .558 527 .497 .469 .442 417 .394 .371 .350 .331 .312 7% .935 .873 .816 .763 .713 .666 .623 .582 .544 .508 .475 .444 .415 .388 .362 .339 .317 .296 .277 .258 8% .926 .857 .794 .735 .681 .630 .583 .540 .500 .463 .429 .397 .368 .340 .315 .292 .270 .250 .232 .215 9% .917 .842 .772 .708 .650 .596 .547 .502 .460 .422 .388 .356 .326 .299 .275 .252 .231 .212 .194 .178 17 18 19 20 Periods 1 2 3 4 5 6 7 8 9 10 11 12 13 10% .909 .826 .751 .683 .621 .564 .513 .467 .424 .386 .350 .319 .290 .263 .239 .218 .198 .180 .164 .149 11% .901 .812 .731 .659 .593 .535 482 .434 .391 .352 .317 .286 .258 .232 .209 .188 .170 .153 .138 .124 12% .893 .797 .712 .636 .567 .507 .452 .404 .361 .322 .287 .257 .229 .205 .183 .163 .146 .130 .116 .104 13% .885 .783 .693 .613 .543 .480 .425 .376 .333 .295 .261 .231 .204 .181 .160 .141 .125 .111 .098 .087 14% .877 .769 .675 .592 .519 .456 .400 .351 .308 .270 .237 .208 .182 .160 .140 .123 .108 .095 .083 .073 15% .870 .756 .658 .572 .497 .432 .376 .327 .284 .247 .215 .187 .163 .141 .123 .107 .093 .081 .070 .061 20% .833 .694 .579 .482 .402 .335 .279 .233 .194 .162 .135 .112 .093 .078 .065 .054 .045 .038 .031 .026 14 15 16 17 18 19 20 APPENDIX B Present Value of Annuity of $1 8% Periods 1 2 3 4 5 6 7 8 9 10 11 3% .971 1.913 2.829 3.717 4.580 5.417 6.230 7.020 7.786 8.530 9.253 9.954 10.635 11.296 11.938 12.561 13.166 13.754 14.324 14.877 4% .962 1.886 2.775 3.630 4.452 5.242 6.002 6.733 7.435 8.111 8.760 9.385 9.986 10.563 11.118 11.652 12.166 12.659 13.134 13.590 5% .952 1.859 2.723 3.546 4.329 5.076 5.786 6.463 7.108 7.722 8.306 8.863 9.394 9.899 10.380 10.838 11.274 11.690 12.085 12.462 6% .943 1.833 2.673 3.465 4.212 4.917 5.582 6.210 6.802 7.360 7.887 8.384 8.853 9.295 9.712 10.106 10.477 10.828 11.158 11.470 7% .935 1.808 2.624 3.387 4.100 4.767 5.389 5.971 6.515 7.024 7.499 7.943 8.358 8.745 9.108 9.447 9.763 10.059 10.336 10.594 .926 1.783 2.577 3.312 3.993 4.623 5.206 5.747 6.247 6.710 7.139 7.536 7.904 8.244 8.559 8.851 9.122 9.372 9.604 9.818 9% .917 1.759 2.531 3.240 3.890 4.486 5.033 5.535 5.995 6.418 6.805 7.161 7.487 7.786 8.061 8.313 8.544 8.756 8.950 9.129 12 13 14 15 16 17 18 19 Oo98 20 Periods 1 2 3 4 5 6 7 8 9 10 10% .909 1.736 2.487 3.170 3.791 4.355 4.868 5.335 5.759 6.145 6.495 6.814 7.103 7.367 7.606 7.824 8.022 8.201 8.365 8.514 11% .901 1.713 2.444 3.102 3.696 4.231 4.712 5.146 5.537 5.889 6.207 6.492 6.750 6.982 7.191 7.379 7.549 7.702 7.839 7.963 12% .893 1.690 2.402 3.037 3.605 4.111 4.564 4.968 5.328 5.650 5.938 6.194 6.424 6.628 6.811 6.974 7.120 7.250 7.366 7.469 13% .885 1.668 2.361 2.974 3.517 3.998 4.423 4.799 5.132 5.426 5.687 5.918 6.122 6.302 6.462 6.604 6.729 6.840 6.938 7.025 14% .877 1.647 2.322 2.914 3.433 3.889 4.288 4.639 4.946 5.216 5.453 5.660 5.842 6.002 6.142 6.265 6.373 6.467 6.550 6.623 15% .870 1.626 2.283 2.855 3.352 3.784 4.160 4.487 4.772 5.019 5.234 5.421 5.583 5.724 5.847 5.954 6.047 6.128 6.198 6.259 20% .833 1.528 2.106 2.589 2.991 3.326 3.605 3.837 4.031 4.192 4.327 4.439 4.533 4.611 4.675 4.730 4.775 4.812 4.843 4.870 11 12 13 14 15 16 17 18 19 20