Firm W, which has a 34 percent marginal tax rate, plans to operate a new business that should generate $40,000 annual cash flow/ordinary income for three years (years 0, 1, and 2). Alternatively, Firm W could form a new taxable entity (Entity N) to operate the business. Entity N would pay tax on the three-year income stream at a 25 percent rate. The nondeductible cost of forming Entity N would be $5,000. If Firm W uses a 6 percent discount rate, should it operate the new business directly or form Entity N to operate the business?
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