$1.$ Does the net present value of future cash flows increase or decrease as the discount rate

increases?

$2.$ Does the after$-$tax cost of a deductible expense increase or decrease as the taxpayer$$s

marginal income tax rate increases?

$3.$ In what circumstance is the before$-$tax cost of an expenditure equal to its after$-$tax cost?

$4.$ Which assumption about the tax consequences of a future transaction is more uncertain:

an assumption based on a provision that has been in the Internal Revenue Code for $25$

years or an assumption based on a provision that Congress added to the code two years

ago?

$5.$ Identify two reasons why a firm$$s actual marginal tax rate for a year could differ from the

projected marginal tax rate for that year.

$6.$ Corporation P owns $85$ percent of the outstanding stock of corporation R$.$ This year,

employees of Corporation R performed extensive management services for Corporation

P$.$ In return for the services, Corporation P paid a $$250,000$ fee to Corporation R$,$ which

Corporation P reported as a deductible business expense.

a$)$ Is the consulting arrangement between the two corporations an arm$$s length transaction?

b$)$ If the IRS challenges the validity of Corporation P$$s deduction, what facts might the

corporation offer as evidence of the validity of the payment?