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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Question
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.
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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