Marina Sabatini – 201900217

Tax Accounting Assignment – Chapter 3

4) a. NPV = present cash inflow – present cash outflow

Cash inflow = 6,200 received in year 0

Cash outflow = [1,890 x 0.864(factor 5%,year3 )] + [4,000 x0.784 (factor 5%, year 5)]

NPV = 6,200-4,769 = 1,431

b. Cash outflow = 10,000 +[ 12,690 x 0.907(factor 5%, year 2)]

= 10,000 + 11,510 = 21,510

Cash inflow = 31,000 x 0.677 (factor 5%, year 8)

= 20,987

NPV = 20,987 – 21,510 = -523

c. Cash inflow = 20,000

Cash outflow =[ 13,500 x 0.784 (factor 5%, year 5)] + [7,500 x 0.614(factor 5%, year 10)]

= 10,584 + 4,605 = 15,189

NPV = 20,000-15,189 = 4,811

6) a. with additional income of 92,000, it would be 35,000 x 10% = 3,500

b. with additional income of 400,000, it would be 35,000 x 15% = 5,250

c. with loss of 16,000, it would be 19,000 (35,000-16,000) x 7% = 1,330

9) a. 50,000 x 30% (marginal tax) = 15,000

50,000 – 15,000 = 35,000

35,000 x 0.943 (factor6% year 1) = 33,005

NPV = 35,000 + 33,005 = 68,005

b. 50,000 x 40% = 20,000

50,000-20,000 = 30,000

NPV = 30,000 x 0.962 (factor 4%, year1) + 30,000 x 0.952 (factor 4%, year 2)

NPV = 28,860 + 28,560 = 57,420

c. 20,000 x 10% = 2,000

20,000-2,000 = 18,000

NPV = 18,000 + [18,000 x 3.239(factor 9%, year 1,2,3,4)]

NPV = 58,302

13) a. Marginal tax rate = (80,000-60,000)/80,000 = 25%

b. 80,000 x 50% = 40,000

Marginal tax rate = (80,000-40,000)/80,000 = 50%

c. 60,000 x 50% = 30,000

Marginal tax rate = (80,000-60,000)/(80,000-30,000) = 20,000/50,000 = 40%

18) a. Year 0 Year 1 Year 2 Year 3

Before tax cash flow (200,000) 15,000 33,000 233,000

Tax cost (35%) (5,250) (11,550) (11,550)

After tax cash flow 9,750 21,450 221,450

Discount factor (8%) 0.926 0.857 0.794

(200,000) 9,028 18,382 175,831

NPV = 3,241

b. Year 0 Year 1 Year 2 Year 3

Before tax cash flow (200,000) 15,000 33,000 233,000

Expenses 25,000 7,000 7,000

Tax cash flow (200,000) 40,000 40,000 240,000

Tax cost (35%) (14,000) (14,000) (14,000)

After tax cash flow 26,000 26,000 226,000

Discount factor (8%) 0.926 0.857 0.794

(200,000) 24,076 22,282 179,444

NPV = 25,802

20) a. Opportunity 1

Year 0 Year 1 Year 2

Before tax cash flow (8000) 5,000 20,000

Tax cost (40%) (3,200) (2,000) (8,000)

After tax cash flow (4800) 3,000 12,000

Discount factor (5%) 0.952 0.907

Present value (4,800) 2,856 10,884

NPV = 8,940

Opportunity 2

Year 0 Year 1 Year 2

Before tax cash flow 6,000 5,000 5,000

Tax cost (40%) (2,400) (2,000) (2,000)

After tax cash flow 3,600 3,000 3,000

Discount factor (5%) 0.952 0.907

Present value 3,600 2,856 2,721

NPV = 9,177

Firm E should choose opportunity 2 which has a higher NPV.

b. Opportunity 1
 Year 0 Year 1 Year 2

Before tax cash flow (8000) 5,000 20,000

Tax cost (15%) (1,200) (750) (3,000)

After tax cash flow (6,800) 4,250 17,000

Discount factor (5%) 0.952 0.907

Present value (6,800) 4,046 15,419

NPV = 12,665

Opportunity 2

Year 0 Year 1 Year 2

Before tax cash flow 6,000 5,000 5,000

Tax cost (15%) (900) (750) (750)

After tax cash flow 5,100 4,250 4,250

Discount factor (5%) 0.952 0.907

Present value 5,100 4,046 3,855

NPV = 13,001

Firm E should not change to choose Opportunity 2

c. Opportunity 1

Year 0 Year 1 Year 2

Before tax cash flow (8000) 5,000 20,000

Tax cost (40%, 15%) (3,200) (750) (3,000)

After tax cash flow (4,800) 4,250 17,000

Discount factor (5%) 0.952 0.907

Present value (4,800) 4,046 15,419

NPV = 14,665

Opportunity 2
 Year 0 Year 1 Year 2

Before tax cash flow 6,000 5,000 5,000

Tax cost (40%,15%) (2,400) (750) (750)

After tax cash flow 3,600 4,250 4,250

Discount factor (5%) 0.952 0.907

Present value 3,600 4,046 3,855

NPV = 11,501

Firm E should change to choose the opportunity 1