The purpose of this case is to introduce and demonstrate, the time-value-of-money topic. The case has two aspects. First, it provides a tutorial on the basic concepts and how-tos associated with straightforward time-value-of-money scenarios.The topics of future value (FV) and present value (PV) are discussed and exemplified for both lump-sum and recurring cash flow situations.The derivation and use of four useful time-value-of-money reference tables are presented to highlight the underlying logic, connections, and mechanics of determining FVs and PVs.Second, the case provides you with several simple vignettes in which you can apply these time-value-of-money insights and techniques.

For this week, complete the six vignettes and answer the assignment questions found in your course pack. Please complete this case on a word document or excel spreadsheet.In order to get full credit you must show your work in it's entirety.

For the Module 3 case assignment, several of the questions require you to consider the tax impact of certain transactions when performing a future or present value analysis.

For a non-taxed entity, the incremental revenue or expense from a particular proposed action is simply the stream of revenues or expenses generated by that action compared with an initial outlay. For instance, if a new machine costs $4,000 and will increase revenues by $1,000 per year over the next five years, $1,000 is the basis for calculating the present value of that incremental income relative to the $4,000 initial outlay.

Tax Impacts

Revenues

For a taxed entity, this calculation is slightly different. Because any new revenue will be taxed, this incremental revenue has to be reduced by the amount of tax attributable that revenue. For instance, assuming a 40% tax rate, the incremental revenue for the transaction describe above would be $600 ($1,000 x (1-.4)=$1,000 x .6 or $600). In other words, the firm would earn an additional $1,000 but would have to pay an additional $400 in taxes on that new revenue for net new revenue of $600.

Expenses

The same impact relates to expenses. If an action results in increased expenses, those increased expenses offset existing income and thus reduce taxes owed. Accordingly, the net expense must be reduced by the tax rate. For instance, if the firm has to pay $100 in annual maintenance on this machine, the net expense would be only $60 ($100 x (1-.4)=$100 x .6 or $60). In other words, the firm would have to pay $100 per year for the maintenance costs but can deduct that $100 expense in calculating its taxes and thus save $40 in taxes so the net impact is $60.

Depreciation

The scenarios above apply to general revenues and expenses, but since depreciation is a unique expense, its tax impact is different. In the example above, assuming the machine had a five year life, it would generate $800 per year in depreciation expense ($4,000 / 5 years = $800). Depreciation expense can be deducted in calculating taxes. Unlike general expenses, however, there is no annual cash outlay for depreciation (the cash was paid up front and the expense is recognized over the asset's useful life). Accordingly, in each year that there is depreciation, that depreciation expense will result in tax savings. In this example, each year there will be tax avoided equal to 40% of the $800 depreciation expense or $320 ($800 x .4 = $320). In other words, the firm will have to pay $320 less tax than it otherwise would have due to deducting the depreciation expense.

At first encounter these concepts can be challenging, but after we work through the free cash flow materials they will become clearer and easier to apply.