Firm D is considering investing $400,000 cash in a three-year project with the following cash flows. Under
Question:
Under each of the following assumptions, determine if Firm D should make the investment. In each case, use a 10 percent discount rate to compute NPV.
a. The revenue is taxable, the expenses are deductible, and the marginal tax rate is 15 percent.
b. The revenue is taxable, the expenses are deductible, and the marginal tax rate is 40 percent.
c. The revenue is taxable, only one-half the expenses are deductible, and the marginal tax rate is 15 percent.
d. Firm D can deduct the expenses in the year paid (against other sources of income) but can defer recognizing the $180,000 total income until year
2. (It will collect the revenues as indicated in years 0, 1, and 2 so that before-tax cash flows dont change.) The marginal tax rate is 40 percent.
Depending upon the context, the discount rate has two different definitions and usages. First, the discount rate refers to the interest rate charged to the commercial banks and other financial institutions for the loans they take from the Federal...
Step by Step Answer:
Principles Of Taxation For Business And Investment Planning 2016 Edition
ISBN: 9781259549250
19th Edition
Authors: Sally Jones, Shelley Rhoades Catanach