Margaret Daniels has the opportunity to invest $695,000 in a new venture. The projected cash flows from the venture are as follows. Use Appendix A and Appendix B. Initial investment Taxable revenue Deductible expenses Return of investment Before-tax net cash flow Year 0 $ (695,000) Year 1 Year 2 Year 3 Year 4 $ 83,500 (10,500) $ 78,500 (10,500) $ 68,500 (18,900) $ 63,500 (18,900) 695,000 $ (695,000) $ 73,000 $ 68,000 $ 49,600 $ 739,600 Margaret uses a 7 percent discount rate. Required: a1. Complete the table below to calculate NPV. Assume Margaret's marginal tax rate over the life of the investment is 15 percent. a2. Should Margaret make the investment? b1. Complete the table below to calculate NPV. Assume Margaret's marginal tax rate over the life of the investment is 20 percent. b2. Should Margaret make the investment? c1. Complete the table below to calculate NPV. Assume Margaret's marginal tax rate in years 1 and 2 is 10 percent and in years 3 and 4 is 25 percent. c2. Should Margaret make the investment?
Margaret Daniels has the opportunity to invest $695,000 in a new venture. The projected cash flows from the venture are as follows. Use Appendix A and Appendix B. Initial investment Taxable revenue Deductible expenses Return of investment Before-tax net cash flow Year 0 $ (695,000) Year 1 Year 2 Year 3 Year 4 $ 83,500 (10,500) $ 78,500 (10,500) $ 68,500 (18,900) $ 63,500 (18,900) 695,000 $ (695,000) $ 73,000 $ 68,000 $ 49,600 $ 739,600 Margaret uses a 7 percent discount rate. Required: a1. Complete the table below to calculate NPV. Assume Margaret's marginal tax rate over the life of the investment is 15 percent. a2. Should Margaret make the investment? b1. Complete the table below to calculate NPV. Assume Margaret's marginal tax rate over the life of the investment is 20 percent. b2. Should Margaret make the investment? c1. Complete the table below to calculate NPV. Assume Margaret's marginal tax rate in years 1 and 2 is 10 percent and in years 3 and 4 is 25 percent. c2. Should Margaret make the investment?
Chapter3: Organizing And Financing A New Venture
Section: Chapter Questions
Problem 5EP
Related questions
Question
Transcribed Image Text:Margaret Daniels has the opportunity to invest $695,000 in a new venture. The projected cash flows from the venture are as follows.
Use Appendix A and Appendix B.
Initial investment
Taxable revenue
Deductible expenses
Return of investment
Before-tax net cash flow
Year 0
$ (695,000)
Year 1
Year 2
Year 3
Year 4
$ 83,500
(10,500)
$ 78,500
(10,500)
$ 68,500
(18,900)
$ 63,500
(18,900)
695,000
$ (695,000)
$ 73,000
$ 68,000
$ 49,600
$ 739,600
Margaret uses a 7 percent discount rate.
Required:
a1. Complete the table below to calculate NPV. Assume Margaret's marginal tax rate over the life of the investment is 15 percent.
a2. Should Margaret make the investment?
b1. Complete the table below to calculate NPV. Assume Margaret's marginal tax rate over the life of the investment is 20 percent.
b2. Should Margaret make the investment?
c1. Complete the table below to calculate NPV. Assume Margaret's marginal tax rate in years 1 and 2 is 10 percent and in years 3 and 4
is 25 percent.
c2. Should Margaret make the investment?
Expert Solution
This question has been solved!
Explore an expertly crafted, step-by-step solution for a thorough understanding of key concepts.
Step by step
Solved in 2 steps
Recommended textbooks for you