Firm E must choose between two business opportunities. Opportunity 1 will generate an $11,200 deductible loss in year 0, $7,000 taxable income in year 1, and $28,000 taxable income in year 2. Opportunity 2 will generate $8,000 taxable income in year O and $7,000 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. Required: a1. Complete the tables below to calculate NPV. a2. Which opportunity should Firm E choose? b1. Complete the tables below to calculate NPV. Assume Firm E's marginal tax rate over the three-year period is 15 percent. b2. Which opportunity should Firm E choose? c1. Complete the tables below to calculate NPV. Assume Firm E's marginal tax rate is 40 percent in year O but only 15 percent in years 1 and 2. c2. Which opportunity should Firm E choose? Complete this question by entering your answers in the tabs below. Req A1 Req A2 Req B1 Req B2 Req C1 Req C2 Complete the tables below to calculate NPV. Note: Cash outflows should be indicated by a minus sign. Round discount factor(s) to 3 decimal places, all other intermediate calculations and final answers to the nearest whole dollar amount. Opportunity 1: Before-tax cash flow Tax (cost) or savings Net cash flow Discount factor (5%) Present value Year 0 Year 1 Year 2
Firm E must choose between two business opportunities. Opportunity 1 will generate an $11,200 deductible loss in year 0, $7,000 taxable income in year 1, and $28,000 taxable income in year 2. Opportunity 2 will generate $8,000 taxable income in year O and $7,000 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. Required: a1. Complete the tables below to calculate NPV. a2. Which opportunity should Firm E choose? b1. Complete the tables below to calculate NPV. Assume Firm E's marginal tax rate over the three-year period is 15 percent. b2. Which opportunity should Firm E choose? c1. Complete the tables below to calculate NPV. Assume Firm E's marginal tax rate is 40 percent in year O but only 15 percent in years 1 and 2. c2. Which opportunity should Firm E choose? Complete this question by entering your answers in the tabs below. Req A1 Req A2 Req B1 Req B2 Req C1 Req C2 Complete the tables below to calculate NPV. Note: Cash outflows should be indicated by a minus sign. Round discount factor(s) to 3 decimal places, all other intermediate calculations and final answers to the nearest whole dollar amount. Opportunity 1: Before-tax cash flow Tax (cost) or savings Net cash flow Discount factor (5%) Present value Year 0 Year 1 Year 2
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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Transcribed Image Text:Firm E must choose between two business opportunities. Opportunity 1 will generate an $11,200 deductible loss in year 0, $7,000
taxable income in year 1, and $28,000 taxable income in year 2. Opportunity 2 will generate $8,000 taxable income in year 0 and
$7,000 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.
Required:
a1. Complete the tables below to calculate NPV.
a2. Which opportunity should Firm E choose?
b1. Complete the tables below to calculate NPV. Assume Firm E's marginal tax rate over the three-year period is 15 percent.
b2. Which opportunity should Firm E choose?
c1. Complete the tables below to calculate NPV. Assume Firm E's marginal tax rate is 40 percent in year 0 but only 15 percent in years 1
and 2.
c2. Which opportunity should Firm E choose?
Complete this question by entering your answers in the tabs below.
Req A1
Req A2
Req B1
Req B2
Req C1
Req C2
Complete the tables below to calculate NPV.
Note: Cash outflows should be indicated by a minus sign. Round discount factor(s) to 3 decimal places, all other intermediate
calculations and final answers to the nearest whole dollar amount.
Opportunity 1:
Before-tax cash flow
Tax (cost) or savings
Net cash flow
Discount factor (5%)
Present value
NPV
Year 0
Year 1
Year 2
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