Calculate net present value (NPV) and identify the opportunity that Firm E should choose.

Question

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Answer 1

Question

Chapter 3, Problem 20AP

a.

To determine

Calculate net present value (NPV) and identify the opportunity that Firm E should choose.

a.

Expert Solution

Explanation of Solution

Opportunity 1:

Step 1: Calculate present value.

	Year 0	Year 1	Year 2
Before-tax cash flow	$(8,000)	$5,000	$20,000
Less: Tax cost	$(3,200)	$(2,000)	$(8,000)
After-tax cash flow	$4,800	$3,000	$12,000
Multiply: Discount factor at 5%	-	× 0.952	× 0 .907
Present value	$(4,800)	$2,856	$10,884

Working note:

Calculate tax cost.

	Year 0	Year 1	Year 2
Taxable income	$8,000	$5,000	$20,000
Multiply: Marginal tax rate	× 0.40	× 0 .40	× 0 .40
Tax cost	$3,200	$2,000	$8,000

Step 2: Calculate NPV.

NPV = (Present value of Year 0+ Present value of Year 1+ Present value of Year 2)=(−$4,800+$2,856+$10,884)=$8,940

Opportunity 2:

Step 1: Calculate present value.

	Year 0	Year 1	Year 2
Before-tax cash flow	$6,000	$5,000	$5,000
Less: Tax cost	$(2,400)	$(2,000)	$(2,000)
After-tax cash flow	$3,600	$3,000	$3,000
Multiply: Discount factor at 5%	-	× 0.952	× 0 .907
Present value	$3,600	$2,856	$2,721

Working note:

Calculate tax cost.

	Year 0	Year 1	Year 2
Taxable income	$6,000	$5,000	$5,000
Multiply: Marginal tax rate	× 0.40	× 0 .40	× 0 .40
Tax cost	$2,400	$2,000	$2,000

Step 2: Calculate NPV.

NPV = (Present value of Year 0+ Present value of Year 1+ Present value of Year 2)=($3,600+$2,856+$2,721)=$9,177

The value of net present value (NPV) of Opportunity 2 is greater than Opportunity 1. Hence, Firm E should choose Opportunity 2.

b.

To determine

Calculate net present value (NPV) and identify the opportunity that Firm E should choose.

b.

Expert Solution

Explanation of Solution

Opportunity 1:

Step 1: Calculate present value.

	Year 0	Year 1	Year 2
Before-tax cash flow	$(8,000)	$5,000	$20,000
Less: Tax cost	$(1,200)	$(750)	$(3,000)
After-tax cash flow	$6,800	$4,250	$17,000
Multiply: Discount factor at 5%	-	× 0.952	× 0 .907
Present value	$(6,800)	$4,046	$15,419

Working note:

Calculate tax cost.

	Year 0	Year 1	Year 2
Taxable income	$8,000	$5,000	$20,000
Multiply: Marginal tax rate	× 0.15	× 0 .15	× 0 .15
Tax cost	$1,200	$750	$3,000

Step 2: Calculate NPV.

NPV = (Present value of Year 0+ Present value of Year 1+ Present value of Year 2)=(−$6,800+$4,046+$15,419)=$12,665

Opportunity 2:

Step 1: Calculate present value.

	Year 0	Year 1	Year 2
Before-tax cash flow	$6,000	$5,000	$5,000
Less: Tax cost	$(900)	$(750)	$(750)
After-tax cash flow	$5,100	$4,250	$4,250
Multiply: Discount factor at 5%	-	× 0.952	× 0 .907
Present value	$5,100	$4,046	$3,855

Working note:

Calculate tax cost.

	Year 0	Year 1	Year 2
Taxable income	$6,000	$5,000	$5,000
Multiply: Marginal tax rate	× 0.15	× 0 .15	× 0 .15
Tax cost	$900	$750	$750

Step 2: Calculate NPV.

NPV = (Present value of Year 0+ Present value of Year 1+ Present value of Year 2)=($5,100+$4,046+$3,855)=$13,001

The value of net present value (NPV) of Opportunity 2 is greater than Opportunity 1. Hence, Firm E should choose Opportunity 2.

c.

To determine

Calculate net present value (NPV) and identify the opportunity that Firm E should choose.

c.

Expert Solution

Explanation of Solution

Opportunity 1:

Step 1: Calculate present value.

	Year 0	Year 1	Year 2
Before-tax cash flow	$(8,000)	$5,000	$20,000
Less: Tax cost	$(3,200)	$(750)	$(3,000)
After-tax cash flow	$4,800	$4,250	$17,000
Multiply: Discount factor at 5%	-	× 0.952	× 0 .907
Present value	$(4,800)	$4,046	$15,419

Working note:

Calculate tax cost.

	Year 0	Year 1	Year 2
Taxable income	$8,000	$5,000	$20,000
Multiply: Marginal tax rate	× 0.40	× 0 .15	× 0 .15
Tax cost	$3,200	$750	$3,000

Step 2: Calculate NPV.

NPV = (Present value of Year 0+ Present value of Year 1+ Present value of Year 2)=(−$4,800+$4,046+$15,419)=$14,665

Opportunity 2:

Step 1: Calculate present value.

	Year 0	Year 1	Year 2
Before-tax cash flow	$6,000	$5,000	$5,000
Less: Tax cost	$(2,400)	$(750)	$(750)
After-tax cash flow	$3,600	$4,250	$4,250
Multiply: Discount factor at 5%	-	× 0.952	× 0 .907
Present value	$3,600	$4,046	$3,855

Working note:

Calculate tax cost.

	Year 0	Year 1	Year 2
Taxable income	$6,000	$5,000	$5,000
Multiply: Marginal tax rate	× 0.40	× 0 .15	× 0 .15
Tax cost	$2,400	$750	$750

Step 2: Calculate NPV.

NPV = (Present value of Year 0+ Present value of Year 1+ Present value of Year 2)=($3,600+$4,046+$3,855)=$11,501

The value of net present value (NPV) of Opportunity 1 is greater than Opportunity 2. Hence, Firm E should choose Opportunity 1.

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Answer 2

Question

Chapter 3, Problem 20AP

a.

To determine

Calculate net present value (NPV) and identify the opportunity that Firm E should choose.

a.

Expert Solution

Explanation of Solution

Opportunity 1:

Step 1: Calculate present value.

	Year 0	Year 1	Year 2
Before-tax cash flow	$(8,000)	$5,000	$20,000
Less: Tax cost	$(3,200)	$(2,000)	$(8,000)
After-tax cash flow	$4,800	$3,000	$12,000
Multiply: Discount factor at 5%	-	× 0.952	× 0 .907
Present value	$(4,800)	$2,856	$10,884

Working note:

Calculate tax cost.

	Year 0	Year 1	Year 2
Taxable income	$8,000	$5,000	$20,000
Multiply: Marginal tax rate	× 0.40	× 0 .40	× 0 .40
Tax cost	$3,200	$2,000	$8,000

Step 2: Calculate NPV.

NPV = (Present value of Year 0+ Present value of Year 1+ Present value of Year 2)=(−$4,800+$2,856+$10,884)=$8,940

Opportunity 2:

Step 1: Calculate present value.

	Year 0	Year 1	Year 2
Before-tax cash flow	$6,000	$5,000	$5,000
Less: Tax cost	$(2,400)	$(2,000)	$(2,000)
After-tax cash flow	$3,600	$3,000	$3,000
Multiply: Discount factor at 5%	-	× 0.952	× 0 .907
Present value	$3,600	$2,856	$2,721

Working note:

Calculate tax cost.

	Year 0	Year 1	Year 2
Taxable income	$6,000	$5,000	$5,000
Multiply: Marginal tax rate	× 0.40	× 0 .40	× 0 .40
Tax cost	$2,400	$2,000	$2,000

Step 2: Calculate NPV.

NPV = (Present value of Year 0+ Present value of Year 1+ Present value of Year 2)=($3,600+$2,856+$2,721)=$9,177

The value of net present value (NPV) of Opportunity 2 is greater than Opportunity 1. Hence, Firm E should choose Opportunity 2.

b.

To determine

Calculate net present value (NPV) and identify the opportunity that Firm E should choose.

b.

Expert Solution

Explanation of Solution

Opportunity 1:

Step 1: Calculate present value.

	Year 0	Year 1	Year 2
Before-tax cash flow	$(8,000)	$5,000	$20,000
Less: Tax cost	$(1,200)	$(750)	$(3,000)
After-tax cash flow	$6,800	$4,250	$17,000
Multiply: Discount factor at 5%	-	× 0.952	× 0 .907
Present value	$(6,800)	$4,046	$15,419

Working note:

Calculate tax cost.

	Year 0	Year 1	Year 2
Taxable income	$8,000	$5,000	$20,000
Multiply: Marginal tax rate	× 0.15	× 0 .15	× 0 .15
Tax cost	$1,200	$750	$3,000

Step 2: Calculate NPV.

NPV = (Present value of Year 0+ Present value of Year 1+ Present value of Year 2)=(−$6,800+$4,046+$15,419)=$12,665

Opportunity 2:

Step 1: Calculate present value.

	Year 0	Year 1	Year 2
Before-tax cash flow	$6,000	$5,000	$5,000
Less: Tax cost	$(900)	$(750)	$(750)
After-tax cash flow	$5,100	$4,250	$4,250
Multiply: Discount factor at 5%	-	× 0.952	× 0 .907
Present value	$5,100	$4,046	$3,855

Working note:

Calculate tax cost.

	Year 0	Year 1	Year 2
Taxable income	$6,000	$5,000	$5,000
Multiply: Marginal tax rate	× 0.15	× 0 .15	× 0 .15
Tax cost	$900	$750	$750

Step 2: Calculate NPV.

NPV = (Present value of Year 0+ Present value of Year 1+ Present value of Year 2)=($5,100+$4,046+$3,855)=$13,001

The value of net present value (NPV) of Opportunity 2 is greater than Opportunity 1. Hence, Firm E should choose Opportunity 2.

c.

To determine

Calculate net present value (NPV) and identify the opportunity that Firm E should choose.

c.

Expert Solution

Explanation of Solution

Opportunity 1:

Step 1: Calculate present value.

	Year 0	Year 1	Year 2
Before-tax cash flow	$(8,000)	$5,000	$20,000
Less: Tax cost	$(3,200)	$(750)	$(3,000)
After-tax cash flow	$4,800	$4,250	$17,000
Multiply: Discount factor at 5%	-	× 0.952	× 0 .907
Present value	$(4,800)	$4,046	$15,419

Working note:

Calculate tax cost.

	Year 0	Year 1	Year 2
Taxable income	$8,000	$5,000	$20,000
Multiply: Marginal tax rate	× 0.40	× 0 .15	× 0 .15
Tax cost	$3,200	$750	$3,000

Step 2: Calculate NPV.

NPV = (Present value of Year 0+ Present value of Year 1+ Present value of Year 2)=(−$4,800+$4,046+$15,419)=$14,665

Opportunity 2:

Step 1: Calculate present value.

	Year 0	Year 1	Year 2
Before-tax cash flow	$6,000	$5,000	$5,000
Less: Tax cost	$(2,400)	$(750)	$(750)
After-tax cash flow	$3,600	$4,250	$4,250
Multiply: Discount factor at 5%	-	× 0.952	× 0 .907
Present value	$3,600	$4,046	$3,855

Working note:

Calculate tax cost.

	Year 0	Year 1	Year 2
Taxable income	$6,000	$5,000	$5,000
Multiply: Marginal tax rate	× 0.40	× 0 .15	× 0 .15
Tax cost	$2,400	$750	$750

Step 2: Calculate NPV.

NPV = (Present value of Year 0+ Present value of Year 1+ Present value of Year 2)=($3,600+$4,046+$3,855)=$11,501

The value of net present value (NPV) of Opportunity 1 is greater than Opportunity 2. Hence, Firm E should choose Opportunity 1.

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Answer 3

Question

Chapter 3, Problem 20AP

a.

To determine

Calculate net present value (NPV) and identify the opportunity that Firm E should choose.

a.

Expert Solution

Explanation of Solution

Opportunity 1:

Step 1: Calculate present value.

	Year 0	Year 1	Year 2
Before-tax cash flow	$(8,000)	$5,000	$20,000
Less: Tax cost	$(3,200)	$(2,000)	$(8,000)
After-tax cash flow	$4,800	$3,000	$12,000
Multiply: Discount factor at 5%	-	× 0.952	× 0 .907
Present value	$(4,800)	$2,856	$10,884

Working note:

Calculate tax cost.

	Year 0	Year 1	Year 2
Taxable income	$8,000	$5,000	$20,000
Multiply: Marginal tax rate	× 0.40	× 0 .40	× 0 .40
Tax cost	$3,200	$2,000	$8,000

Step 2: Calculate NPV.

NPV = (Present value of Year 0+ Present value of Year 1+ Present value of Year 2)=(−$4,800+$2,856+$10,884)=$8,940

Opportunity 2:

Step 1: Calculate present value.

	Year 0	Year 1	Year 2
Before-tax cash flow	$6,000	$5,000	$5,000
Less: Tax cost	$(2,400)	$(2,000)	$(2,000)
After-tax cash flow	$3,600	$3,000	$3,000
Multiply: Discount factor at 5%	-	× 0.952	× 0 .907
Present value	$3,600	$2,856	$2,721

Working note:

Calculate tax cost.

	Year 0	Year 1	Year 2
Taxable income	$6,000	$5,000	$5,000
Multiply: Marginal tax rate	× 0.40	× 0 .40	× 0 .40
Tax cost	$2,400	$2,000	$2,000

Step 2: Calculate NPV.

NPV = (Present value of Year 0+ Present value of Year 1+ Present value of Year 2)=($3,600+$2,856+$2,721)=$9,177

The value of net present value (NPV) of Opportunity 2 is greater than Opportunity 1. Hence, Firm E should choose Opportunity 2.

b.

To determine

Calculate net present value (NPV) and identify the opportunity that Firm E should choose.

b.

Expert Solution

Explanation of Solution

Opportunity 1:

Step 1: Calculate present value.

	Year 0	Year 1	Year 2
Before-tax cash flow	$(8,000)	$5,000	$20,000
Less: Tax cost	$(1,200)	$(750)	$(3,000)
After-tax cash flow	$6,800	$4,250	$17,000
Multiply: Discount factor at 5%	-	× 0.952	× 0 .907
Present value	$(6,800)	$4,046	$15,419

Working note:

Calculate tax cost.

	Year 0	Year 1	Year 2
Taxable income	$8,000	$5,000	$20,000
Multiply: Marginal tax rate	× 0.15	× 0 .15	× 0 .15
Tax cost	$1,200	$750	$3,000

Step 2: Calculate NPV.

NPV = (Present value of Year 0+ Present value of Year 1+ Present value of Year 2)=(−$6,800+$4,046+$15,419)=$12,665

Opportunity 2:

Step 1: Calculate present value.

	Year 0	Year 1	Year 2
Before-tax cash flow	$6,000	$5,000	$5,000
Less: Tax cost	$(900)	$(750)	$(750)
After-tax cash flow	$5,100	$4,250	$4,250
Multiply: Discount factor at 5%	-	× 0.952	× 0 .907
Present value	$5,100	$4,046	$3,855

Working note:

Calculate tax cost.

	Year 0	Year 1	Year 2
Taxable income	$6,000	$5,000	$5,000
Multiply: Marginal tax rate	× 0.15	× 0 .15	× 0 .15
Tax cost	$900	$750	$750

Step 2: Calculate NPV.

NPV = (Present value of Year 0+ Present value of Year 1+ Present value of Year 2)=($5,100+$4,046+$3,855)=$13,001

The value of net present value (NPV) of Opportunity 2 is greater than Opportunity 1. Hence, Firm E should choose Opportunity 2.

c.

To determine

Calculate net present value (NPV) and identify the opportunity that Firm E should choose.

c.

Expert Solution

Explanation of Solution

Opportunity 1:

Step 1: Calculate present value.

	Year 0	Year 1	Year 2
Before-tax cash flow	$(8,000)	$5,000	$20,000
Less: Tax cost	$(3,200)	$(750)	$(3,000)
After-tax cash flow	$4,800	$4,250	$17,000
Multiply: Discount factor at 5%	-	× 0.952	× 0 .907
Present value	$(4,800)	$4,046	$15,419

Working note:

Calculate tax cost.

	Year 0	Year 1	Year 2
Taxable income	$8,000	$5,000	$20,000
Multiply: Marginal tax rate	× 0.40	× 0 .15	× 0 .15
Tax cost	$3,200	$750	$3,000

Step 2: Calculate NPV.

NPV = (Present value of Year 0+ Present value of Year 1+ Present value of Year 2)=(−$4,800+$4,046+$15,419)=$14,665

Opportunity 2:

Step 1: Calculate present value.

	Year 0	Year 1	Year 2
Before-tax cash flow	$6,000	$5,000	$5,000
Less: Tax cost	$(2,400)	$(750)	$(750)
After-tax cash flow	$3,600	$4,250	$4,250
Multiply: Discount factor at 5%	-	× 0.952	× 0 .907
Present value	$3,600	$4,046	$3,855

Working note:

Calculate tax cost.

	Year 0	Year 1	Year 2
Taxable income	$6,000	$5,000	$5,000
Multiply: Marginal tax rate	× 0.40	× 0 .15	× 0 .15
Tax cost	$2,400	$750	$750

Step 2: Calculate NPV.

NPV = (Present value of Year 0+ Present value of Year 1+ Present value of Year 2)=($3,600+$4,046+$3,855)=$11,501

The value of net present value (NPV) of Opportunity 1 is greater than Opportunity 2. Hence, Firm E should choose Opportunity 1.

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Answer 4

Question

Chapter 3, Problem 20AP

a.

To determine

Calculate net present value (NPV) and identify the opportunity that Firm E should choose.

a.

Expert Solution

Explanation of Solution

Opportunity 1:

Step 1: Calculate present value.

	Year 0	Year 1	Year 2
Before-tax cash flow	$(8,000)	$5,000	$20,000
Less: Tax cost	$(3,200)	$(2,000)	$(8,000)
After-tax cash flow	$4,800	$3,000	$12,000
Multiply: Discount factor at 5%	-	× 0.952	× 0 .907
Present value	$(4,800)	$2,856	$10,884

Working note:

Calculate tax cost.

	Year 0	Year 1	Year 2
Taxable income	$8,000	$5,000	$20,000
Multiply: Marginal tax rate	× 0.40	× 0 .40	× 0 .40
Tax cost	$3,200	$2,000	$8,000

Step 2: Calculate NPV.

NPV = (Present value of Year 0+ Present value of Year 1+ Present value of Year 2)=(−$4,800+$2,856+$10,884)=$8,940

Opportunity 2:

Step 1: Calculate present value.

	Year 0	Year 1	Year 2
Before-tax cash flow	$6,000	$5,000	$5,000
Less: Tax cost	$(2,400)	$(2,000)	$(2,000)
After-tax cash flow	$3,600	$3,000	$3,000
Multiply: Discount factor at 5%	-	× 0.952	× 0 .907
Present value	$3,600	$2,856	$2,721

Working note:

Calculate tax cost.

	Year 0	Year 1	Year 2
Taxable income	$6,000	$5,000	$5,000
Multiply: Marginal tax rate	× 0.40	× 0 .40	× 0 .40
Tax cost	$2,400	$2,000	$2,000

Step 2: Calculate NPV.

NPV = (Present value of Year 0+ Present value of Year 1+ Present value of Year 2)=($3,600+$2,856+$2,721)=$9,177

The value of net present value (NPV) of Opportunity 2 is greater than Opportunity 1. Hence, Firm E should choose Opportunity 2.

b.

To determine

Calculate net present value (NPV) and identify the opportunity that Firm E should choose.

b.

Expert Solution

Explanation of Solution

Opportunity 1:

Step 1: Calculate present value.

	Year 0	Year 1	Year 2
Before-tax cash flow	$(8,000)	$5,000	$20,000
Less: Tax cost	$(1,200)	$(750)	$(3,000)
After-tax cash flow	$6,800	$4,250	$17,000
Multiply: Discount factor at 5%	-	× 0.952	× 0 .907
Present value	$(6,800)	$4,046	$15,419

Working note:

Calculate tax cost.

	Year 0	Year 1	Year 2
Taxable income	$8,000	$5,000	$20,000
Multiply: Marginal tax rate	× 0.15	× 0 .15	× 0 .15
Tax cost	$1,200	$750	$3,000

Step 2: Calculate NPV.

NPV = (Present value of Year 0+ Present value of Year 1+ Present value of Year 2)=(−$6,800+$4,046+$15,419)=$12,665

Opportunity 2:

Step 1: Calculate present value.

	Year 0	Year 1	Year 2
Before-tax cash flow	$6,000	$5,000	$5,000
Less: Tax cost	$(900)	$(750)	$(750)
After-tax cash flow	$5,100	$4,250	$4,250
Multiply: Discount factor at 5%	-	× 0.952	× 0 .907
Present value	$5,100	$4,046	$3,855

Working note:

Calculate tax cost.

	Year 0	Year 1	Year 2
Taxable income	$6,000	$5,000	$5,000
Multiply: Marginal tax rate	× 0.15	× 0 .15	× 0 .15
Tax cost	$900	$750	$750

Step 2: Calculate NPV.

NPV = (Present value of Year 0+ Present value of Year 1+ Present value of Year 2)=($5,100+$4,046+$3,855)=$13,001

The value of net present value (NPV) of Opportunity 2 is greater than Opportunity 1. Hence, Firm E should choose Opportunity 2.

c.

To determine

Calculate net present value (NPV) and identify the opportunity that Firm E should choose.

c.

Expert Solution

Explanation of Solution

Opportunity 1:

Step 1: Calculate present value.

	Year 0	Year 1	Year 2
Before-tax cash flow	$(8,000)	$5,000	$20,000
Less: Tax cost	$(3,200)	$(750)	$(3,000)
After-tax cash flow	$4,800	$4,250	$17,000
Multiply: Discount factor at 5%	-	× 0.952	× 0 .907
Present value	$(4,800)	$4,046	$15,419

Working note:

Calculate tax cost.

	Year 0	Year 1	Year 2
Taxable income	$8,000	$5,000	$20,000
Multiply: Marginal tax rate	× 0.40	× 0 .15	× 0 .15
Tax cost	$3,200	$750	$3,000

Step 2: Calculate NPV.

NPV = (Present value of Year 0+ Present value of Year 1+ Present value of Year 2)=(−$4,800+$4,046+$15,419)=$14,665

Opportunity 2:

Step 1: Calculate present value.

	Year 0	Year 1	Year 2
Before-tax cash flow	$6,000	$5,000	$5,000
Less: Tax cost	$(2,400)	$(750)	$(750)
After-tax cash flow	$3,600	$4,250	$4,250
Multiply: Discount factor at 5%	-	× 0.952	× 0 .907
Present value	$3,600	$4,046	$3,855

Working note:

Calculate tax cost.

	Year 0	Year 1	Year 2
Taxable income	$6,000	$5,000	$5,000
Multiply: Marginal tax rate	× 0.40	× 0 .15	× 0 .15
Tax cost	$2,400	$750	$750

Step 2: Calculate NPV.

NPV = (Present value of Year 0+ Present value of Year 1+ Present value of Year 2)=($3,600+$4,046+$3,855)=$11,501

The value of net present value (NPV) of Opportunity 1 is greater than Opportunity 2. Hence, Firm E should choose Opportunity 1.

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Answer 5

Chapter 3, Problem 20AP

a.

To determine

Calculate net present value (NPV) and identify the opportunity that Firm E should choose.

a.

Expert Solution

Explanation of Solution

Opportunity 1:

Step 1: Calculate present value.

	Year 0	Year 1	Year 2
Before-tax cash flow	$(8,000)	$5,000	$20,000
Less: Tax cost	$(3,200)	$(2,000)	$(8,000)
After-tax cash flow	$4,800	$3,000	$12,000
Multiply: Discount factor at 5%	-	× 0.952	× 0 .907
Present value	$(4,800)	$2,856	$10,884

Working note:

Calculate tax cost.

	Year 0	Year 1	Year 2
Taxable income	$8,000	$5,000	$20,000
Multiply: Marginal tax rate	× 0.40	× 0 .40	× 0 .40
Tax cost	$3,200	$2,000	$8,000

Step 2: Calculate NPV.

NPV = (Present value of Year 0+ Present value of Year 1+ Present value of Year 2)=(−$4,800+$2,856+$10,884)=$8,940

Opportunity 2:

Step 1: Calculate present value.

	Year 0	Year 1	Year 2
Before-tax cash flow	$6,000	$5,000	$5,000
Less: Tax cost	$(2,400)	$(2,000)	$(2,000)
After-tax cash flow	$3,600	$3,000	$3,000
Multiply: Discount factor at 5%	-	× 0.952	× 0 .907
Present value	$3,600	$2,856	$2,721

Working note:

Calculate tax cost.

	Year 0	Year 1	Year 2
Taxable income	$6,000	$5,000	$5,000
Multiply: Marginal tax rate	× 0.40	× 0 .40	× 0 .40
Tax cost	$2,400	$2,000	$2,000

Step 2: Calculate NPV.

NPV = (Present value of Year 0+ Present value of Year 1+ Present value of Year 2)=($3,600+$2,856+$2,721)=$9,177

The value of net present value (NPV) of Opportunity 2 is greater than Opportunity 1. Hence, Firm E should choose Opportunity 2.

b.

To determine

Calculate net present value (NPV) and identify the opportunity that Firm E should choose.

b.

Expert Solution

Explanation of Solution

Opportunity 1:

Step 1: Calculate present value.

	Year 0	Year 1	Year 2
Before-tax cash flow	$(8,000)	$5,000	$20,000
Less: Tax cost	$(1,200)	$(750)	$(3,000)
After-tax cash flow	$6,800	$4,250	$17,000
Multiply: Discount factor at 5%	-	× 0.952	× 0 .907
Present value	$(6,800)	$4,046	$15,419

Working note:

Calculate tax cost.

	Year 0	Year 1	Year 2
Taxable income	$8,000	$5,000	$20,000
Multiply: Marginal tax rate	× 0.15	× 0 .15	× 0 .15
Tax cost	$1,200	$750	$3,000

Step 2: Calculate NPV.

NPV = (Present value of Year 0+ Present value of Year 1+ Present value of Year 2)=(−$6,800+$4,046+$15,419)=$12,665

Opportunity 2:

Step 1: Calculate present value.

	Year 0	Year 1	Year 2
Before-tax cash flow	$6,000	$5,000	$5,000
Less: Tax cost	$(900)	$(750)	$(750)
After-tax cash flow	$5,100	$4,250	$4,250
Multiply: Discount factor at 5%	-	× 0.952	× 0 .907
Present value	$5,100	$4,046	$3,855

Working note:

Calculate tax cost.

	Year 0	Year 1	Year 2
Taxable income	$6,000	$5,000	$5,000
Multiply: Marginal tax rate	× 0.15	× 0 .15	× 0 .15
Tax cost	$900	$750	$750

Step 2: Calculate NPV.

NPV = (Present value of Year 0+ Present value of Year 1+ Present value of Year 2)=($5,100+$4,046+$3,855)=$13,001

The value of net present value (NPV) of Opportunity 2 is greater than Opportunity 1. Hence, Firm E should choose Opportunity 2.

c.

To determine

Calculate net present value (NPV) and identify the opportunity that Firm E should choose.

c.

Expert Solution

Explanation of Solution

Opportunity 1:

Step 1: Calculate present value.

	Year 0	Year 1	Year 2
Before-tax cash flow	$(8,000)	$5,000	$20,000
Less: Tax cost	$(3,200)	$(750)	$(3,000)
After-tax cash flow	$4,800	$4,250	$17,000
Multiply: Discount factor at 5%	-	× 0.952	× 0 .907
Present value	$(4,800)	$4,046	$15,419

Working note:

Calculate tax cost.

	Year 0	Year 1	Year 2
Taxable income	$8,000	$5,000	$20,000
Multiply: Marginal tax rate	× 0.40	× 0 .15	× 0 .15
Tax cost	$3,200	$750	$3,000

Step 2: Calculate NPV.

NPV = (Present value of Year 0+ Present value of Year 1+ Present value of Year 2)=(−$4,800+$4,046+$15,419)=$14,665

Opportunity 2:

Step 1: Calculate present value.

	Year 0	Year 1	Year 2
Before-tax cash flow	$6,000	$5,000	$5,000
Less: Tax cost	$(2,400)	$(750)	$(750)
After-tax cash flow	$3,600	$4,250	$4,250
Multiply: Discount factor at 5%	-	× 0.952	× 0 .907
Present value	$3,600	$4,046	$3,855

Working note:

Calculate tax cost.

	Year 0	Year 1	Year 2
Taxable income	$6,000	$5,000	$5,000
Multiply: Marginal tax rate	× 0.40	× 0 .15	× 0 .15
Tax cost	$2,400	$750	$750

Step 2: Calculate NPV.

NPV = (Present value of Year 0+ Present value of Year 1+ Present value of Year 2)=($3,600+$4,046+$3,855)=$11,501

The value of net present value (NPV) of Opportunity 1 is greater than Opportunity 2. Hence, Firm E should choose Opportunity 1.

Answer 6

Chapter 3, Problem 20AP

a.

To determine

Calculate net present value (NPV) and identify the opportunity that Firm E should choose.

a.

Expert Solution

Explanation of Solution

Opportunity 1:

Step 1: Calculate present value.

	Year 0	Year 1	Year 2
Before-tax cash flow	$(8,000)	$5,000	$20,000
Less: Tax cost	$(3,200)	$(2,000)	$(8,000)
After-tax cash flow	$4,800	$3,000	$12,000
Multiply: Discount factor at 5%	-	× 0.952	× 0 .907
Present value	$(4,800)	$2,856	$10,884

Working note:

Calculate tax cost.

	Year 0	Year 1	Year 2
Taxable income	$8,000	$5,000	$20,000
Multiply: Marginal tax rate	× 0.40	× 0 .40	× 0 .40
Tax cost	$3,200	$2,000	$8,000

Step 2: Calculate NPV.

NPV = (Present value of Year 0+ Present value of Year 1+ Present value of Year 2)=(−$4,800+$2,856+$10,884)=$8,940

Opportunity 2:

Step 1: Calculate present value.

	Year 0	Year 1	Year 2
Before-tax cash flow	$6,000	$5,000	$5,000
Less: Tax cost	$(2,400)	$(2,000)	$(2,000)
After-tax cash flow	$3,600	$3,000	$3,000
Multiply: Discount factor at 5%	-	× 0.952	× 0 .907
Present value	$3,600	$2,856	$2,721

Working note:

Calculate tax cost.

	Year 0	Year 1	Year 2
Taxable income	$6,000	$5,000	$5,000
Multiply: Marginal tax rate	× 0.40	× 0 .40	× 0 .40
Tax cost	$2,400	$2,000	$2,000

Step 2: Calculate NPV.

NPV = (Present value of Year 0+ Present value of Year 1+ Present value of Year 2)=($3,600+$2,856+$2,721)=$9,177

The value of net present value (NPV) of Opportunity 2 is greater than Opportunity 1. Hence, Firm E should choose Opportunity 2.

Answer 7

Chapter 3, Problem 20AP

a.

To determine

Calculate net present value (NPV) and identify the opportunity that Firm E should choose.

Answer 8

a.

Expert Solution

Explanation of Solution

Opportunity 1:

Step 1: Calculate present value.

	Year 0	Year 1	Year 2
Before-tax cash flow	$(8,000)	$5,000	$20,000
Less: Tax cost	$(3,200)	$(2,000)	$(8,000)
After-tax cash flow	$4,800	$3,000	$12,000
Multiply: Discount factor at 5%	-	× 0.952	× 0 .907
Present value	$(4,800)	$2,856	$10,884

Working note:

Calculate tax cost.

	Year 0	Year 1	Year 2
Taxable income	$8,000	$5,000	$20,000
Multiply: Marginal tax rate	× 0.40	× 0 .40	× 0 .40
Tax cost	$3,200	$2,000	$8,000

Step 2: Calculate NPV.

NPV = (Present value of Year 0+ Present value of Year 1+ Present value of Year 2)=(−$4,800+$2,856+$10,884)=$8,940

Opportunity 2:

Step 1: Calculate present value.

	Year 0	Year 1	Year 2
Before-tax cash flow	$6,000	$5,000	$5,000
Less: Tax cost	$(2,400)	$(2,000)	$(2,000)
After-tax cash flow	$3,600	$3,000	$3,000
Multiply: Discount factor at 5%	-	× 0.952	× 0 .907
Present value	$3,600	$2,856	$2,721

Working note:

Calculate tax cost.

	Year 0	Year 1	Year 2
Taxable income	$6,000	$5,000	$5,000
Multiply: Marginal tax rate	× 0.40	× 0 .40	× 0 .40
Tax cost	$2,400	$2,000	$2,000

Step 2: Calculate NPV.

NPV = (Present value of Year 0+ Present value of Year 1+ Present value of Year 2)=($3,600+$2,856+$2,721)=$9,177

The value of net present value (NPV) of Opportunity 2 is greater than Opportunity 1. Hence, Firm E should choose Opportunity 2.

Answer 9

a.

Expert Solution

Answer 10

a.

Expert Solution

Answer 11

Expert Solution

Answer 12

b.

To determine

Calculate net present value (NPV) and identify the opportunity that Firm E should choose.

b.

Expert Solution

Explanation of Solution

Opportunity 1:

Step 1: Calculate present value.

	Year 0	Year 1	Year 2
Before-tax cash flow	$(8,000)	$5,000	$20,000
Less: Tax cost	$(1,200)	$(750)	$(3,000)
After-tax cash flow	$6,800	$4,250	$17,000
Multiply: Discount factor at 5%	-	× 0.952	× 0 .907
Present value	$(6,800)	$4,046	$15,419

Working note:

Calculate tax cost.

	Year 0	Year 1	Year 2
Taxable income	$8,000	$5,000	$20,000
Multiply: Marginal tax rate	× 0.15	× 0 .15	× 0 .15
Tax cost	$1,200	$750	$3,000

Step 2: Calculate NPV.

NPV = (Present value of Year 0+ Present value of Year 1+ Present value of Year 2)=(−$6,800+$4,046+$15,419)=$12,665

Opportunity 2:

Step 1: Calculate present value.

	Year 0	Year 1	Year 2
Before-tax cash flow	$6,000	$5,000	$5,000
Less: Tax cost	$(900)	$(750)	$(750)
After-tax cash flow	$5,100	$4,250	$4,250
Multiply: Discount factor at 5%	-	× 0.952	× 0 .907
Present value	$5,100	$4,046	$3,855

Working note:

Calculate tax cost.

	Year 0	Year 1	Year 2
Taxable income	$6,000	$5,000	$5,000
Multiply: Marginal tax rate	× 0.15	× 0 .15	× 0 .15
Tax cost	$900	$750	$750

Step 2: Calculate NPV.

NPV = (Present value of Year 0+ Present value of Year 1+ Present value of Year 2)=($5,100+$4,046+$3,855)=$13,001

The value of net present value (NPV) of Opportunity 2 is greater than Opportunity 1. Hence, Firm E should choose Opportunity 2.

Answer 13

b.

To determine

Calculate net present value (NPV) and identify the opportunity that Firm E should choose.

Answer 14

b.

Expert Solution

Explanation of Solution

Opportunity 1:

Step 1: Calculate present value.

	Year 0	Year 1	Year 2
Before-tax cash flow	$(8,000)	$5,000	$20,000
Less: Tax cost	$(1,200)	$(750)	$(3,000)
After-tax cash flow	$6,800	$4,250	$17,000
Multiply: Discount factor at 5%	-	× 0.952	× 0 .907
Present value	$(6,800)	$4,046	$15,419

Working note:

Calculate tax cost.

	Year 0	Year 1	Year 2
Taxable income	$8,000	$5,000	$20,000
Multiply: Marginal tax rate	× 0.15	× 0 .15	× 0 .15
Tax cost	$1,200	$750	$3,000

Step 2: Calculate NPV.

NPV = (Present value of Year 0+ Present value of Year 1+ Present value of Year 2)=(−$6,800+$4,046+$15,419)=$12,665

Opportunity 2:

Step 1: Calculate present value.

	Year 0	Year 1	Year 2
Before-tax cash flow	$6,000	$5,000	$5,000
Less: Tax cost	$(900)	$(750)	$(750)
After-tax cash flow	$5,100	$4,250	$4,250
Multiply: Discount factor at 5%	-	× 0.952	× 0 .907
Present value	$5,100	$4,046	$3,855

Working note:

Calculate tax cost.

	Year 0	Year 1	Year 2
Taxable income	$6,000	$5,000	$5,000
Multiply: Marginal tax rate	× 0.15	× 0 .15	× 0 .15
Tax cost	$900	$750	$750

Step 2: Calculate NPV.

NPV = (Present value of Year 0+ Present value of Year 1+ Present value of Year 2)=($5,100+$4,046+$3,855)=$13,001

The value of net present value (NPV) of Opportunity 2 is greater than Opportunity 1. Hence, Firm E should choose Opportunity 2.

Answer 15

b.

Expert Solution

Answer 16

b.

Expert Solution

Answer 17

Expert Solution

Answer 18

c.

To determine

Calculate net present value (NPV) and identify the opportunity that Firm E should choose.

c.

Expert Solution

Explanation of Solution

Opportunity 1:

Step 1: Calculate present value.

	Year 0	Year 1	Year 2
Before-tax cash flow	$(8,000)	$5,000	$20,000
Less: Tax cost	$(3,200)	$(750)	$(3,000)
After-tax cash flow	$4,800	$4,250	$17,000
Multiply: Discount factor at 5%	-	× 0.952	× 0 .907
Present value	$(4,800)	$4,046	$15,419

Working note:

Calculate tax cost.

	Year 0	Year 1	Year 2
Taxable income	$8,000	$5,000	$20,000
Multiply: Marginal tax rate	× 0.40	× 0 .15	× 0 .15
Tax cost	$3,200	$750	$3,000

Step 2: Calculate NPV.

NPV = (Present value of Year 0+ Present value of Year 1+ Present value of Year 2)=(−$4,800+$4,046+$15,419)=$14,665

Opportunity 2:

Step 1: Calculate present value.

	Year 0	Year 1	Year 2
Before-tax cash flow	$6,000	$5,000	$5,000
Less: Tax cost	$(2,400)	$(750)	$(750)
After-tax cash flow	$3,600	$4,250	$4,250
Multiply: Discount factor at 5%	-	× 0.952	× 0 .907
Present value	$3,600	$4,046	$3,855

Working note:

Calculate tax cost.

	Year 0	Year 1	Year 2
Taxable income	$6,000	$5,000	$5,000
Multiply: Marginal tax rate	× 0.40	× 0 .15	× 0 .15
Tax cost	$2,400	$750	$750

Step 2: Calculate NPV.

NPV = (Present value of Year 0+ Present value of Year 1+ Present value of Year 2)=($3,600+$4,046+$3,855)=$11,501

The value of net present value (NPV) of Opportunity 1 is greater than Opportunity 2. Hence, Firm E should choose Opportunity 1.

Answer 19

c.

To determine

Calculate net present value (NPV) and identify the opportunity that Firm E should choose.

Answer 20

c.

Expert Solution

Explanation of Solution

Opportunity 1:

Step 1: Calculate present value.

	Year 0	Year 1	Year 2
Before-tax cash flow	$(8,000)	$5,000	$20,000
Less: Tax cost	$(3,200)	$(750)	$(3,000)
After-tax cash flow	$4,800	$4,250	$17,000
Multiply: Discount factor at 5%	-	× 0.952	× 0 .907
Present value	$(4,800)	$4,046	$15,419

Working note:

Calculate tax cost.

	Year 0	Year 1	Year 2
Taxable income	$8,000	$5,000	$20,000
Multiply: Marginal tax rate	× 0.40	× 0 .15	× 0 .15
Tax cost	$3,200	$750	$3,000

Step 2: Calculate NPV.

NPV = (Present value of Year 0+ Present value of Year 1+ Present value of Year 2)=(−$4,800+$4,046+$15,419)=$14,665

Opportunity 2:

Step 1: Calculate present value.

	Year 0	Year 1	Year 2
Before-tax cash flow	$6,000	$5,000	$5,000
Less: Tax cost	$(2,400)	$(750)	$(750)
After-tax cash flow	$3,600	$4,250	$4,250
Multiply: Discount factor at 5%	-	× 0.952	× 0 .907
Present value	$3,600	$4,046	$3,855

Working note:

Calculate tax cost.

	Year 0	Year 1	Year 2
Taxable income	$6,000	$5,000	$5,000
Multiply: Marginal tax rate	× 0.40	× 0 .15	× 0 .15
Tax cost	$2,400	$750	$750

Step 2: Calculate NPV.

NPV = (Present value of Year 0+ Present value of Year 1+ Present value of Year 2)=($3,600+$4,046+$3,855)=$11,501

The value of net present value (NPV) of Opportunity 1 is greater than Opportunity 2. Hence, Firm E should choose Opportunity 1.

Answer 21

c.

Expert Solution

Answer 22

c.

Expert Solution

Answer 23

Expert Solution

Answer 24

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Calculate net present value (NPV) and identify the opportunity that Firm E should choose.

Calculate net present value (NPV) and identify the opportunity that Firm E should choose.

Explanation of Solution

Calculate net present value (NPV) and identify the opportunity that Firm E should choose.

Explanation of Solution

Calculate net present value (NPV) and identify the opportunity that Firm E should choose.

Explanation of Solution

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