Question

Firm Q is about to engage in a transaction with the following cash flows over a three-year period. Use Arpendix A and Appendix B. Taxable revenue Deductible expenses Nondeductible expenses Year @ $18,300 (6,700) (725) Year 1 $19,000 (8,700) (2,500) Year 2 $27,800 (9,250) If the firm's marginal tax rate over the three-year period is 30 percent and its discount rate is 6 percent, compute the NPV of the transaction. (Expenses and cash outflows should be indicated by a minus sign. Round discount factor(s) to 3 decimal places and your intermediate calculations to the nearest whole dollar amount.) Year 0 18,300 Year 1 19,000 Year 2 27.800 $ $ Revenue Expenses Tax cost Net cash flow Discount factor Present value NPV 18 300 $ 19,000 $ 800 18,300 $ 19,000 27.800

Answer 1

		Main answer
		Particulars	Year 0	Year 1	Year 2
		Revenue	18,300	19,900	27,800
		Expenses	(6,700)	(8,700)	(9,250)
		Tax Cost	(3,480)	(3,360)	(5,565)
		Net cash flow	8,120	7,840	12,985
		Discount Factor	1.000	0.943	0.890
		Present value	8,120	7,396	11,557
		NPV	27,073
		Answer with working
	Reference	Particulars	Year 0	Year 1	Year 2
	A	Revenue	18,300	19,900	27,800
	B	Expenses	(6,700)	(8,700)	(9,250)
	C=A+B	Net taxable income	11,600	11,200	18,550
	D=C*30%	Tax Cost @ 30%	(3,480)	(3,360)	(5,565)
	E=C+D	Net cash flow after taxes	8,120	7,840	12,985
	F	Discount Factor @6% (1/(1+6%)^ year	1	0.943	0.890
		Working		=1/(1+6%)^1	=1/(1+6%)^2
	G=E*F	Present value	8,120	7,396	11,557
	H	NPV (8,120+7,396+11,557)	27,073
The discounting factor for year 0 will always be 1 because there is no time gap between the cash receipt the today