Firm X has the opportunity to invest $315,000 in a new venture. The projected cash flows from
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Question:
Firm X has the opportunity to invest $315,000 in a new venture. The projected cash flows from the venture are as follows. Use Appendix A and Appendix B.
Year 0 | Year 1 | Year 2 | Year 3 | |||||||||||||
Initial investment | $ | (315,000 | ) | |||||||||||||
Revenues | $ | 54,400 | $ | 54,400 | $ | 54,400 | ||||||||||
Expenses | (32,640 | ) | (8,160 | ) | (8,160 | ) | ||||||||||
Return of investment | 315,000 | |||||||||||||||
Before-tax net cash flow | (315,000 | ) | $ | 21,760 | $ | 46,240 | $ | 361,240 | ||||||||
Firm X uses an 8 percent discount rate, and its marginal tax rate over the life of the venture will be 25 percent.
Required:
- a-1. Complete the below table to calculate NPV. Assume that the revenues are taxable income, and the expenses are deductible.
- a-2. Should firm X make the investment?
- b-1. Complete the below table to calculate NPV. Assume that the revenues are taxable income, but the expenses are nondeductible.
- b-2. Should firm X make the investment?
Year 0 | Year 1 | Year 2 | Year 3 | |
Before-tax cash flow | ||||
Tax cost | ||||
Net cash flow | ||||
Discount factor 8% | ||||
Present value | ||||
NPV |
Related Book For
Principles Of Taxation For Business And Investment Planning 2016 Edition
ISBN: 9781259549250
19th Edition
Authors: Sally Jones, Shelley Rhoades Catanach
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