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a. Complete the below tables to calculate NPV. b. Should it operate the new business directly or form Entity N to operate the business?

a. Complete the below tables to calculate NPV. b. Should it operate the new business directly or form Entity N to operate the business?

Essentials Of Investments
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Firm W, which has a 30 percent marginal tax rate, plans to operate a new business that should generate $58,000 annual cash flow and ordinary income for three years (years 0, 1, and 2). Alternatively, Firm W could form a new taxable entity (Entity N) to operate the business. Entity N would pay tax on the three-year income stream at a 20 percent rate. The nondeductible cost of forming Entity N would be $6,800. Firm W uses a 5 percent discount rate. Use Appendix A and Appendix B. Required: a. Complete the below tables to calculate NPV. b. Should it operate the new business directly or form Entity N to operate the business? Answer is not complete. Complete this question by entering your answers in the tabs below.
Transcribed Image Text:Firm W, which has a 30 percent marginal tax rate, plans to operate a new business that should generate $58,000 annual cash flow and ordinary income for three years (years 0, 1, and 2). Alternatively, Firm W could form a new taxable entity (Entity N) to operate the business. Entity N would pay tax on the three-year income stream at a 20 percent rate. The nondeductible cost of forming Entity N would be $6,800. Firm W uses a 5 percent discount rate. Use Appendix A and Appendix B. Required: a. Complete the below tables to calculate NPV. b. Should it operate the new business directly or form Entity N to operate the business? Answer is not complete. Complete this question by entering your answers in the tabs below.
> Answer Is not complete. Complete this question by entering your answers in the tabs below. Required A Required B Complete the below tables to calculate NPV. Note: Cash outflows should be indicated by a minus sign. Round discount factors to 3 decimal places. Round intermediate calculations and final answers to the nearest whole dollar amount. Year 0 Year 1 Year 2 Business operated by Firm W: After-tax cash flow at 30% tax rate $ 2,040 $ 17,400 $ 58,000 Discount factor (5%) 55,238.100 X 52,416.270 Present value $ 040 $ $ 961,142,940 3,040,143,660 NPV Business operated by Entity N: After-tax cash flow at 20% tax rate Cost of forming Entity N Net cash flow Discount factor (5%) Present value NPV 8 $ 0 $ 85,671 X $ 0 $ 0 Required B
Transcribed Image Text:> Answer Is not complete. Complete this question by entering your answers in the tabs below. Required A Required B Complete the below tables to calculate NPV. Note: Cash outflows should be indicated by a minus sign. Round discount factors to 3 decimal places. Round intermediate calculations and final answers to the nearest whole dollar amount. Year 0 Year 1 Year 2 Business operated by Firm W: After-tax cash flow at 30% tax rate $ 2,040 $ 17,400 $ 58,000 Discount factor (5%) 55,238.100 X 52,416.270 Present value $ 040 $ $ 961,142,940 3,040,143,660 NPV Business operated by Entity N: After-tax cash flow at 20% tax rate Cost of forming Entity N Net cash flow Discount factor (5%) Present value NPV 8 $ 0 $ 85,671 X $ 0 $ 0 Required B
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