Taxable Revenues
$ 80,000 $ 65,000 $ 35,000 Expenses
$ (25,000)
$ (25,000)
$ (10,000)
Before-tax net cash flow
$ (345,000)
$ 40,000 $ 425,000 Tax Cost
$ (22,000)
$ (16,000)
$ (10,000)
After Tax Net Cash Flow
$ (367,000)
$ 24,000 $ 415,000 Discount factor
- 0.909 0.826 Present value
$ (367,000)
$ 21,816 $ 342,790 NPV
$ (2,394)
c.
The revenue is taxable, only one-half of the expenses are deductible, and the marginal tax rate
is 15%.
Yes. Firm D should make the investment because the NPV is positive.
Year 0
Year 1
Year 2
(Investment)/return of investment
$ (400,000)
$ - $ 400,000 Taxable Revenues
$ 80,000 $ 65,000 $ 35,000 Expenses
$ (25,000)
$ (25,000)
$ (10,000)
Before-tax net cash flow
$ (345,000)
$ 40,000 $ 425,000 Tax Cost
$ (10,125)
$ (7,875)
$ (4,500)
After Tax Net Cash Flow
$ (355,125)
$ 32,125 $ 420,500 Discount factor
- 0.909 0.826 Present value
$ (355,125)
$ 29,202 $ 347,333 NPV
$ 21,410 d.
Firm D can deduct the expenses in the year paid (against other sources of income) but can defer recognizing the $180,000 total income until year 2. (It will collect the revenues as indicated in years 0, 1, and 2 so that before-tax cash flows don’t change). The marginal tax rate is 40%.
Yes.
Firm D should make the investment because the NPV is positive.
Year 0
Year 1
Year 2
(Investment)/return of investment
$ (400,000)
$ - $ 400,000 Revenues
$ 80,000 $ 65,000 $ 35,000 Taxable Revenues
$ - $ - $ 180,000 Expenses
$ (25,000)
$ (25,000)
$ (10,000)
Before-tax net cash flow
$ (345,000)
$ 40,000 $ 425,000 Tax Savings (against other $ 10,000 $ 10,000 $ (68,000)
After Tax Net Cash Flow
$ (335,000)
$ 50,000 $ 357,000 Discount factor
- 0.909 0.826 Present value
$ (335,000)
$ 45,450 $ 294,882 NPV
$ 5,332
