Chapter 4, Problem 9AP

Company K has a 30 percent marginal tax rate and uses a 7 percent discount rate to compute NPV. The company started a venture that will yield the following before-tax cash flows: year 0, $12,000; year 1, $21,000; year 2, $24,000; year 3, $17,600.

1. a. If the before-tax cash flows represent taxable income in the year received, compute the NPV of the cash flows.
2. b. Compute the NPV if Company K can defer the receipt of years 0 and 1 cash flows/income until year 2. (It would receive no cash in years 0 and 1 and would receive $57,000 cash in year 2.)
3. c. Compute the NPV if Company K can defer paying tax on years 0 and 1 cash flows until year 2. (It would receive $24,000 cash in year 2 but would pay tax on $57,000 income.)