Chapter 6, Problem 1TPC

Company Y began business in February 2019. By the end of the calendar year, it had billed its clients for $3.5 million of services and had incurred $800,000 of operating expenses. As of December 31, it had collected $2.9 million of its billings and had paid $670,000 of its expenses. It expects to collect the remaining outstanding bills and pay the remaining expenses by March 2020. Company Y adopted a calendar year for federal tax purposes. It may use either the cash method or the accrual method of accounting on its first tax return, and it has asked you to quantify the value of using the cash method for the first year. In doing so, assume Company Y uses a 5 percent discount rate to compute NPV.