Principles Of Taxation For Business And Investment Planning 2020 Edition
23rd Edition
ISBN: 9781259969546
Author: Sally Jones, Shelley C. Rhoades-Catanach, Sandra R Callaghan
Publisher: McGraw-Hill Education
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Textbook Question
Chapter 3, Problem 17AP
Investor W has the opportunity to invest $500,000 in a new venture. The projected
Investor W uses a 7 percent discount rate to compute
- a. Her marginal tax rate over the life of the investment is 15 percent.
- b. Her marginal tax rate over the life of the investment is 20 percent.
- c. Her marginal tax rate in years 1 and 2 is 10 percent and in years 3 and 4 is 25 percent.
a.
Expert Solution
To determine
Calculate net present value (NPV) and identify whether Investor W should make the investment or not.
Explanation of Solution
Calculate net present value (NPV) and identify whether Investor W should make the investment or not.
Step 1: Calculate present value.
| Year 0 | Year 1 | Year 2 | Year 3 | Year 4 | |
| Before-tax cash flow | $(500,000) | $52,500 | $47,500 | $35,500 | $530,500 |
| Less: Tax cost | - | $(7,875) | $(7,125) | $(5,325) | $(4,575) |
| After-tax cash flow | - | $44,625 | $40,375 | $30,175 | $525,925 |
| Multiply: Discount factor at 7% | - | ||||
| Present value | $(500,000) | $41,724 | $35,247 | $24,623 | $401,281 |
Working note:
Calculate tax cost.
| Year 1 | Year 2 | Year 3 | Year 4 | |
| Taxable income | $52,500 | $47,500 | $35,500 | $30,500 |
| Multiply: Marginal tax rate | ||||
| Tax cost | $7,875 | $7,125 | $5,325 | $4,575 |
Step 2: Calculate NPV.
The value of net present value (NPV) is positive. Hence, Investor W should make the investment.
b.
Expert Solution
To determine
Calculate net present value (NPV) and identify whether Investor W should make the investment or not.
Explanation of Solution
Calculate net present value (NPV) and identify whether Investor W should make the investment or not.
Step 1: Calculate present value.
| Year 0 | Year 1 | Year 2 | Year 3 | Year 4 | |
| Before-tax cash flow | $(500,000) | $52,500 | $47,500 | $35,500 | $530,500 |
| Less: Tax cost | - | $(10,500) | $(9,500) | $(7,100) | $(6,100) |
| After-tax cash flow | - | $42,000 | $38,000 | $28,400 | $524,400 |
| Multiply: Discount factor at 7% | - | ||||
| Present value | $(500,000) | $39,270 | $33,174 | $23,174 | $400,117 |
Working note:
Calculate tax cost.
| Year 1 | Year 2 | Year 3 | Year 4 | |
| Taxable income | $52,500 | $47,500 | $35,500 | $30,500 |
| Multiply: Marginal tax rate | ||||
| Tax cost | $10,500 | $9,500 | $7,100 | $6,100 |
Step 2: Calculate NPV.
The value of net present value (NPV) is negative. Hence, Investor W should not make the investment.
c.
Expert Solution
To determine
Calculate net present value (NPV) and identify whether Investor W should make the investment or not.
Explanation of Solution
Calculate net present value (NPV) and identify whether Investor W should make the investment or not.
Step 1: Calculate present value.
| Year 0 | Year 1 | Year 2 | Year 3 | Year 4 | |
| Before-tax cash flow | $(500,000) | $52,500 | $47,500 | $35,500 | $530,500 |
| Less: Tax cost | - | $(5,250) | $(4,750) | $(8,875) | $(7,625) |
| After-tax cash flow | - | $47,250 | $42,750 | $26,625 | $522,875 |
| Multiply: Discount factor at 7% | - | ||||
| Present value | $(500,000) | $44,179 | $37,321 | $21,726 | $398,954 |
Working note:
Calculate tax cost.
| Year 1 | Year 2 | Year 3 | Year 4 | |
| Taxable income | $52,500 | $47,500 | $35,500 | $30,500 |
| Multiply: Marginal tax rate | ||||
| Tax cost | $5,250 | $4,750 | $8,875 | $7,625 |
Step 2: Calculate NPV.
The value of net present value (NPV) is positive. Hence, Investor W should make the investment.
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Please step by step answer.
Chapter 3 Solutions
Principles Of Taxation For Business And Investment Planning 2020 Edition
Ch. 3 - Does the NPV of future cash flows increase or...Ch. 3 - Explain the relationship between the degree of...Ch. 3 - Does the after-tax cost of a deductible expense...Ch. 3 - Prob. 4QPDCh. 3 - Prob. 5QPDCh. 3 - Prob. 6QPDCh. 3 - Prob. 7QPDCh. 3 - Which type of tax law provision should be more...Ch. 3 - In the U.S. system of criminal justice, a person...Ch. 3 - Identify two reasons why a firms actual marginal...
Ch. 3 - Prob. 11QPDCh. 3 - Prob. 12QPDCh. 3 - Prob. 1APCh. 3 - Prob. 2APCh. 3 - Prob. 3APCh. 3 - Use a 5 percent discount rate to compute the NPV...Ch. 3 - Consider the following opportunities: Opportunity...Ch. 3 - Prob. 6APCh. 3 - Refer to the income tax rate structure in the...Ch. 3 - Prob. 8APCh. 3 - Company N will receive 100,000 of taxable revenue...Ch. 3 - Prob. 10APCh. 3 - Investor B has 100,000 in an investment paying 9...Ch. 3 - Firm E must choose between two alternative...Ch. 3 - Company J must choose between two alternate...Ch. 3 - Firm Q is about to engage in a transaction with...Ch. 3 - Corporation ABC invested in a project that will...Ch. 3 - Prob. 16APCh. 3 - Investor W has the opportunity to invest 500,000...Ch. 3 - Prob. 18APCh. 3 - Prob. 19APCh. 3 - Prob. 20APCh. 3 - Prob. 21APCh. 3 - Prob. 1IRPCh. 3 - Firm V must choose between two alternative...Ch. 3 - Prob. 3IRPCh. 3 - Refer to the facts in problem 3. Company WB is...Ch. 3 - Prob. 5IRPCh. 3 - Prob. 6IRPCh. 3 - Prob. 7IRPCh. 3 - Prob. 8IRPCh. 3 - Prob. 9IRPCh. 3 - Prob. 1TPCCh. 3 - Firm D is considering investing 400,000 cash in a...
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