Firm X has the opportunity to invest $200,000 in a new venture. The projected cash flows from the venture are as follows.

Firm X uses an 8 percent discount rate to compute NPV, and its marginal tax rate over the life of the venture will be 35 percent. Determine if Firm X should make the investment, assuming that:
a. The revenues are taxable income, and the expenses are deductible.
b. The revenues are taxable income, but the expenses are nondeductible.

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Year 0 Year 1 Year 2 Year 3 Initial investment Revenues Expenses Return of investment Before-tax net cash flow $(200,000) $40,000 $40,000 40,000 (25,000) (7,000) (7,000 $(200,000) $15,000 $33,000 $233,000