Chapter 4, Problem 10AP

Firm H has the opportunity to engage in a transaction that will generate $100,000 cash flow (and taxable income) in year 0.

1. a. Calculate the after-tax cash flow from the transaction described above.
2. b. How does the NPV of the transaction change if the firm could restructure the transaction in a way that doesn’t change before-tax cash flow but results in no taxable income in year 0, $50,000 taxable income in year 1, and the remaining $50,000 taxable income in year 2? Assume a 6 percent discount rate and a 21 percent marginal tax rate for the three-year period.