Firm E must choose between two business opportunities. Opportunity 1 will generate an $8,640 deductible loss in year 0, $5,400
taxable income in year 1, and $21,600 taxable income in year 2. Opportunity 2 will generate $
6,400 taxable income in year 0 and
$5,400 taxable
income in years 1 and 2. The income and loss reflect before-tax cash inflow
and outflow. Firm E uses a 5 percent
discount rate and has a 40 percent marginal tax rate over the
three-year period. Use Appendix A and Appendix B
Required:
a1. Complete the tables below to calculate NPV.
a2. Which opportunity should Firm E choose?
b1. Complete the tables below to calculate NPV. Assume Firm E's marginal tax rate over the three-year period is 15 percent.
b2. Which opportunity should Firm E
choose
?
c1. Complete the tables below to calculate NPV. Assume Firm E's marginal tax rate is 40 percent in year 0 but only 15 percent in years 1
and 2.
c2. Which opportunity should Firm E choose?
Complete this question by entering your answers in the tabs below.
Req A1
Req A2
Req B1
Req B2
Req C1
Req C2
Complete the tables below to calculate NPV.
Note: Cash outflows should be indicated by a minus sign. Round discount factor(s) to 3 decimal places, all other intermediate
calculations and final answers to the nearest whole dollar amount.
Year 0
Year 1
Year 2
Opportunity 1:
Before-tax cash flow
$
Tax (cost) or savings
1,296 $
0
810 $
3,240
4,590
18,360
Net cash flow
$
1,296 $
5,400 $
21,600
Discount factor (5%)
Present value
$
1,296
NPV
Opportunity 2
Before-tax cash flow
Tax cost
Net cash flow
$
0 $
0 $
0
