Problem 03-16 [LO 3-3, 3-5]

Firm E must choose between two business opportunities. Opportunity 1 will generate an $8,000 deductible loss in year 0, $5,000 taxable income in year 1, and $20,000 taxable income in year 2. Opportunity 2 will generate $6,000 taxable income in year 0 and $5,000 taxable income in years 1 and 2. The income and loss reflect before-tax cash inflow and outflow. Firm E uses a 5 percent discount rate and has a 40 percent marginal tax rate over the three-year period. Use Appendix A and Appendix B. (Cash outflows should be indicated by a minus sign. Round discount factor(s) to 3 decimal places, intermediate calculations and final answers to the nearest whole dollar amount. Enter tax rate in decimal and not in percentage.)

a-1.	Complete the tables below to calculate NPV.

Opportunity 1:

Opportunity 2:

a-2.

Which opportunity should Firm E choose?

	Opportunity 1
	Opportunity 2

b-1.	Complete the tables below to calculate NPV. Assume Firm Es marginal tax rate over the three-year period is 15 percent.

Opportunity 1:

Opportunity 2:

b-2.

Which opportunity should Firm E choose?

	Opportunity 1
	Opportunity 2

c-1.	Complete the tables below to calculate NPV. Assume Firm Es marginal tax rate is 40 percent in year 0 but only 15 percent in years 1 and 2.

Opportunity 1:

Opportunity 2:

c-2.

Which opportunity should Firm E choose?

	Opportunity 1
	Opportunity 2