EBK PRINCIPLES OF TAXATION FOR BUSINESS
22nd Edition
ISBN: 9781260161533
Author: Jones
Publisher: MCGRAW HILL BOOK COMPANY
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Question
Chapter 3, Problem 20AP
a.
To determine
Calculate
a.
Expert Solution
Explanation of Solution
Opportunity 1:
Step 1: Calculate present value.
| Year 0 | Year 1 | Year 2 | |
| Before-tax | $(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% | - | ||
| 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 | |||
| Tax cost | $3,200 | $2,000 | $8,000 |
Step 2: Calculate NPV.
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% | - | ||
| 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 | |||
| Tax cost | $2,400 | $2,000 | $2,000 |
Step 2: Calculate NPV.
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% | - | ||
| 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 | |||
| Tax cost | $1,200 | $750 | $3,000 |
Step 2: Calculate NPV.
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% | - | ||
| 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 | |||
| Tax cost | $900 | $750 | $750 |
Step 2: Calculate NPV.
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% | - | ||
| 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 | |||
| Tax cost | $3,200 | $750 | $3,000 |
Step 2: Calculate NPV.
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% | - | ||
| 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 | |||
| Tax cost | $2,400 | $750 | $750 |
Step 2: Calculate NPV.
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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Chapter 3 Solutions
EBK PRINCIPLES OF TAXATION FOR BUSINESS
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Ch. 3 - Prob. 11QPDCh. 3 - Prob. 12QPDCh. 3 - Prob. 1APCh. 3 - Prob. 2APCh. 3 - Prob. 3APCh. 3 - Use a 5 percent discount rate to compute the NPV...Ch. 3 - Consider the following opportunities: Opportunity...Ch. 3 - Prob. 6APCh. 3 - Refer to the income tax rate structure in the...Ch. 3 - Prob. 8APCh. 3 - Company N will receive 100,000 of taxable revenue...Ch. 3 - Prob. 10APCh. 3 - Investor B has 100,000 in an investment paying 9...Ch. 3 - Firm E must choose between two alternative...Ch. 3 - Company J must choose between two alternate...Ch. 3 - Firm Q is about to engage in a transaction with...Ch. 3 - Corporation ABC invested in a project that will...Ch. 3 - Prob. 16APCh. 3 - Investor W has the opportunity to invest 500,000...Ch. 3 - Prob. 18APCh. 3 - Prob. 19APCh. 3 - Prob. 20APCh. 3 - Prob. 21APCh. 3 - Prob. 1IRPCh. 3 - Firm V must choose between two alternative...Ch. 3 - Prob. 3IRPCh. 3 - Refer to the facts in problem 3. Company WB is...Ch. 3 - Prob. 5IRPCh. 3 - Prob. 6IRPCh. 3 - Prob. 7IRPCh. 3 - Prob. 8IRPCh. 3 - Prob. 9IRPCh. 3 - Prob. 1TPCCh. 3 - Firm D is considering investing 400,000 cash in a...
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