Investor W has the opportunity to invest $500,000 in a new venture. The projected cash flows from the venture are as follows: Investor W uses a 7 percent discount rate to compute NPV . Determine if she should make this investment assuming that: 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.

Question

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Answer 1

Textbook Question

Chapter 3, Problem 17AP

Investor W has the opportunity to invest $500,000 in a new venture. The projected cash flows from the venture are as follows:

Chapter 3, Problem 17AP, Investor W has the opportunity to invest 500,000 in a new venture. The projected cash flows from the

Investor W uses a 7 percent discount rate to compute NPV. Determine if she should make this investment assuming that:

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%	-	× 0.935	× 0 .873	× 0 .816	× 0 .763
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	× 0.15	× 0 .15	× 0 .15	× 0 .15
Tax cost	$7,875	$7,125	$5,325	$4,575

Step 2: Calculate NPV.

NPV = (Present value of Year 0+ Present value of Year 1+ Present value of Year 2+ Present value of Year 3+ Present value of Year 4)=(−$500,000+$41,724+$35,247+$24,623+$401,281)=$2,875

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%	-	× 0.935	× 0 .873	× 0 .816	× 0 .763
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	× 0.20	× 0 .20	× 0 .20	× 0 .20
Tax cost	$10,500	$9,500	$7,100	$6,100

Step 2: Calculate NPV.

NPV = (Present value of Year 0+ Present value of Year 1+ Present value of Year 2+ Present value of Year 3+ Present value of Year 4)=(−$500,000+$39,270+$33,174+$23,174+$400,117)=−$4,265

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%	-	× 0.935	× 0 .873	× 0 .816	× 0 .763
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	× 0.10	× 0 .10	× 0 .25	× 0 .25
Tax cost	$5,250	$4,750	$8,875	$7,625

Step 2: Calculate NPV.

NPV = (Present value of Year 0+ Present value of Year 1+ Present value of Year 2+ Present value of Year 3+ Present value of Year 4)=(−$500,000+$44,179+$37,321+$21,726+$398,954)=$2,180

The value of net present value (NPV) is positive. Hence, Investor W should make the investment.

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Answer 2

Textbook Question

Chapter 3, Problem 17AP

Investor W has the opportunity to invest $500,000 in a new venture. The projected cash flows from the venture are as follows:

Chapter 3, Problem 17AP, Investor W has the opportunity to invest 500,000 in a new venture. The projected cash flows from the

Investor W uses a 7 percent discount rate to compute NPV. Determine if she should make this investment assuming that:

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%	-	× 0.935	× 0 .873	× 0 .816	× 0 .763
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	× 0.15	× 0 .15	× 0 .15	× 0 .15
Tax cost	$7,875	$7,125	$5,325	$4,575

Step 2: Calculate NPV.

NPV = (Present value of Year 0+ Present value of Year 1+ Present value of Year 2+ Present value of Year 3+ Present value of Year 4)=(−$500,000+$41,724+$35,247+$24,623+$401,281)=$2,875

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%	-	× 0.935	× 0 .873	× 0 .816	× 0 .763
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	× 0.20	× 0 .20	× 0 .20	× 0 .20
Tax cost	$10,500	$9,500	$7,100	$6,100

Step 2: Calculate NPV.

NPV = (Present value of Year 0+ Present value of Year 1+ Present value of Year 2+ Present value of Year 3+ Present value of Year 4)=(−$500,000+$39,270+$33,174+$23,174+$400,117)=−$4,265

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%	-	× 0.935	× 0 .873	× 0 .816	× 0 .763
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	× 0.10	× 0 .10	× 0 .25	× 0 .25
Tax cost	$5,250	$4,750	$8,875	$7,625

Step 2: Calculate NPV.

NPV = (Present value of Year 0+ Present value of Year 1+ Present value of Year 2+ Present value of Year 3+ Present value of Year 4)=(−$500,000+$44,179+$37,321+$21,726+$398,954)=$2,180

The value of net present value (NPV) is positive. Hence, Investor W should make the investment.

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Answer 3

Textbook Question

Chapter 3, Problem 17AP

Investor W has the opportunity to invest $500,000 in a new venture. The projected cash flows from the venture are as follows:

Chapter 3, Problem 17AP, Investor W has the opportunity to invest 500,000 in a new venture. The projected cash flows from the

Investor W uses a 7 percent discount rate to compute NPV. Determine if she should make this investment assuming that:

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%	-	× 0.935	× 0 .873	× 0 .816	× 0 .763
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	× 0.15	× 0 .15	× 0 .15	× 0 .15
Tax cost	$7,875	$7,125	$5,325	$4,575

Step 2: Calculate NPV.

NPV = (Present value of Year 0+ Present value of Year 1+ Present value of Year 2+ Present value of Year 3+ Present value of Year 4)=(−$500,000+$41,724+$35,247+$24,623+$401,281)=$2,875

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%	-	× 0.935	× 0 .873	× 0 .816	× 0 .763
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	× 0.20	× 0 .20	× 0 .20	× 0 .20
Tax cost	$10,500	$9,500	$7,100	$6,100

Step 2: Calculate NPV.

NPV = (Present value of Year 0+ Present value of Year 1+ Present value of Year 2+ Present value of Year 3+ Present value of Year 4)=(−$500,000+$39,270+$33,174+$23,174+$400,117)=−$4,265

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%	-	× 0.935	× 0 .873	× 0 .816	× 0 .763
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	× 0.10	× 0 .10	× 0 .25	× 0 .25
Tax cost	$5,250	$4,750	$8,875	$7,625

Step 2: Calculate NPV.

NPV = (Present value of Year 0+ Present value of Year 1+ Present value of Year 2+ Present value of Year 3+ Present value of Year 4)=(−$500,000+$44,179+$37,321+$21,726+$398,954)=$2,180

The value of net present value (NPV) is positive. Hence, Investor W should make the investment.

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Answer 4

Textbook Question

Chapter 3, Problem 17AP

Investor W has the opportunity to invest $500,000 in a new venture. The projected cash flows from the venture are as follows:

Chapter 3, Problem 17AP, Investor W has the opportunity to invest 500,000 in a new venture. The projected cash flows from the

Investor W uses a 7 percent discount rate to compute NPV. Determine if she should make this investment assuming that:

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%	-	× 0.935	× 0 .873	× 0 .816	× 0 .763
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	× 0.15	× 0 .15	× 0 .15	× 0 .15
Tax cost	$7,875	$7,125	$5,325	$4,575

Step 2: Calculate NPV.

NPV = (Present value of Year 0+ Present value of Year 1+ Present value of Year 2+ Present value of Year 3+ Present value of Year 4)=(−$500,000+$41,724+$35,247+$24,623+$401,281)=$2,875

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%	-	× 0.935	× 0 .873	× 0 .816	× 0 .763
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	× 0.20	× 0 .20	× 0 .20	× 0 .20
Tax cost	$10,500	$9,500	$7,100	$6,100

Step 2: Calculate NPV.

NPV = (Present value of Year 0+ Present value of Year 1+ Present value of Year 2+ Present value of Year 3+ Present value of Year 4)=(−$500,000+$39,270+$33,174+$23,174+$400,117)=−$4,265

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%	-	× 0.935	× 0 .873	× 0 .816	× 0 .763
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	× 0.10	× 0 .10	× 0 .25	× 0 .25
Tax cost	$5,250	$4,750	$8,875	$7,625

Step 2: Calculate NPV.

NPV = (Present value of Year 0+ Present value of Year 1+ Present value of Year 2+ Present value of Year 3+ Present value of Year 4)=(−$500,000+$44,179+$37,321+$21,726+$398,954)=$2,180

The value of net present value (NPV) is positive. Hence, Investor W should make the investment.

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Answer 5

Textbook Question

Answer 6

Textbook Question

Answer 7

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%	-	× 0.935	× 0 .873	× 0 .816	× 0 .763
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	× 0.15	× 0 .15	× 0 .15	× 0 .15
Tax cost	$7,875	$7,125	$5,325	$4,575

Step 2: Calculate NPV.

NPV = (Present value of Year 0+ Present value of Year 1+ Present value of Year 2+ Present value of Year 3+ Present value of Year 4)=(−$500,000+$41,724+$35,247+$24,623+$401,281)=$2,875

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%	-	× 0.935	× 0 .873	× 0 .816	× 0 .763
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	× 0.20	× 0 .20	× 0 .20	× 0 .20
Tax cost	$10,500	$9,500	$7,100	$6,100

Step 2: Calculate NPV.

NPV = (Present value of Year 0+ Present value of Year 1+ Present value of Year 2+ Present value of Year 3+ Present value of Year 4)=(−$500,000+$39,270+$33,174+$23,174+$400,117)=−$4,265

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%	-	× 0.935	× 0 .873	× 0 .816	× 0 .763
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	× 0.10	× 0 .10	× 0 .25	× 0 .25
Tax cost	$5,250	$4,750	$8,875	$7,625

Step 2: Calculate NPV.

NPV = (Present value of Year 0+ Present value of Year 1+ Present value of Year 2+ Present value of Year 3+ Present value of Year 4)=(−$500,000+$44,179+$37,321+$21,726+$398,954)=$2,180

The value of net present value (NPV) is positive. Hence, Investor W should make the investment.

Answer 8

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%	-	× 0.935	× 0 .873	× 0 .816	× 0 .763
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	× 0.15	× 0 .15	× 0 .15	× 0 .15
Tax cost	$7,875	$7,125	$5,325	$4,575

Step 2: Calculate NPV.

NPV = (Present value of Year 0+ Present value of Year 1+ Present value of Year 2+ Present value of Year 3+ Present value of Year 4)=(−$500,000+$41,724+$35,247+$24,623+$401,281)=$2,875

The value of net present value (NPV) is positive. Hence, Investor W should make the investment.

Answer 9

a.

Expert Solution

Answer 10

a.

Expert Solution

Answer 11

Expert Solution

Answer 12

To determine

Calculate net present value (NPV) and identify whether Investor W should make the investment or not.

Answer 13

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%	-	× 0.935	× 0 .873	× 0 .816	× 0 .763
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	× 0.15	× 0 .15	× 0 .15	× 0 .15
Tax cost	$7,875	$7,125	$5,325	$4,575

Step 2: Calculate NPV.

NPV = (Present value of Year 0+ Present value of Year 1+ Present value of Year 2+ Present value of Year 3+ Present value of Year 4)=(−$500,000+$41,724+$35,247+$24,623+$401,281)=$2,875

The value of net present value (NPV) is positive. Hence, Investor W should make the investment.

Answer 14

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%	-	× 0.935	× 0 .873	× 0 .816	× 0 .763
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	× 0.20	× 0 .20	× 0 .20	× 0 .20
Tax cost	$10,500	$9,500	$7,100	$6,100

Step 2: Calculate NPV.

NPV = (Present value of Year 0+ Present value of Year 1+ Present value of Year 2+ Present value of Year 3+ Present value of Year 4)=(−$500,000+$39,270+$33,174+$23,174+$400,117)=−$4,265

The value of net present value (NPV) is negative. Hence, Investor W should not make the investment.

Answer 15

b.

Expert Solution

Answer 16

b.

Expert Solution

Answer 17

Expert Solution

Answer 18

To determine

Calculate net present value (NPV) and identify whether Investor W should make the investment or not.

Answer 19

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%	-	× 0.935	× 0 .873	× 0 .816	× 0 .763
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	× 0.20	× 0 .20	× 0 .20	× 0 .20
Tax cost	$10,500	$9,500	$7,100	$6,100

Step 2: Calculate NPV.

NPV = (Present value of Year 0+ Present value of Year 1+ Present value of Year 2+ Present value of Year 3+ Present value of Year 4)=(−$500,000+$39,270+$33,174+$23,174+$400,117)=−$4,265

The value of net present value (NPV) is negative. Hence, Investor W should not make the investment.

Answer 20

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%	-	× 0.935	× 0 .873	× 0 .816	× 0 .763
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	× 0.10	× 0 .10	× 0 .25	× 0 .25
Tax cost	$5,250	$4,750	$8,875	$7,625

Step 2: Calculate NPV.

NPV = (Present value of Year 0+ Present value of Year 1+ Present value of Year 2+ Present value of Year 3+ Present value of Year 4)=(−$500,000+$44,179+$37,321+$21,726+$398,954)=$2,180

The value of net present value (NPV) is positive. Hence, Investor W should make the investment.

Answer 21

c.

Expert Solution

Answer 22

c.

Expert Solution

Answer 23

Expert Solution

Answer 24

To determine

Calculate net present value (NPV) and identify whether Investor W should make the investment or not.

Answer 25

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%	-	× 0.935	× 0 .873	× 0 .816	× 0 .763
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	× 0.10	× 0 .10	× 0 .25	× 0 .25
Tax cost	$5,250	$4,750	$8,875	$7,625

Step 2: Calculate NPV.

NPV = (Present value of Year 0+ Present value of Year 1+ Present value of Year 2+ Present value of Year 3+ Present value of Year 4)=(−$500,000+$44,179+$37,321+$21,726+$398,954)=$2,180

The value of net present value (NPV) is positive. Hence, Investor W should make the investment.

Answer 26

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