Mr. Cox has the choice between two transactions. Transaction A will generate $500,000 taxable cash flow in the current year (year 0). Transaction B will generate $460,000 cash flow in the current year, but Mr. Cox will not be required to report $460,000 income until next year (year 1). Mr. Cox has a 40% marginal tax rate and uses a 10% discount rate to compute NPV. Which of the following statements is true?

A. Mr. Cox should choose transaction A because it generates more before-tax cash flow.

B. Mr. Cox should choose transaction A because its NPV exceeds transaction B's NPV.

C. Mr. Cox should choose transaction B because the tax cost is deferred one year.

D. Mr. Cox should choose transaction B because its NPV exceeds transaction A's NPV.

Answer rating: 100% (QA)

Answer Correct Optiin B Mr Cox should choose transact... View the full answer