Question

340 upany Khas a $4,000 loss before considering the additional deduction. pany P must choose between two alternate transactions. The cash nerated by Transaction 1 is taxable, and the cash generated by Transaction bis nontaxable. Determine the marginal tax rate at which the after-tax cash flows from the two transactions are equal assuming that: Transaction I generates $100.000 of income and Transaction 2 generates S60,000 of income. b. Transaction i generates $160,000 of income and Transaction 2 generates $120,000 of income. 9. Company N will receive $100,000 of taxable revenue from a client. Compute the NPV of the $100,000 in each of the following cases a. Company N will receive $50,000 now (year o) and $50,000 in year 1. The company's marginal tax rate is 30 percent, and it uses a 6 percent discount rate. b. Company N will receive $50.000 in year 1 and $50,000 in year 2. The company's marginal tax rate is 40 percent, and it uses a 4 percent discount rate. c. Company N will receive $20,000 now (year o) and $20,000 in years 1, 2, 3, and 4. The company's marginal tax rate is 10 percent, and it uses a 9 percent discount rate. 10. Taxpayer Y, who has a 30 percent marginal tax rate, invested $65,000 in a bond that pays 8 percent annual interest. Compute Y's annual net cash flow from this investment assuming that: a. The interest is tax-exempt income. b. The interest is taxable income. 11. Investor B has $100,000 in an investment paying 9 percent taxable interest per annum. Each year B incurs $825 of expenses relating to this investment. Compute B's annual net cash flow assuming the following: a. B's marginal tax rate is 10 percent, and the annual expense is not deductible. b. B's marginal tax rate is 35 percent, and the annual expense is deductible. c. B's marginal tax rate is 25 percent, and the annual expense is not deductible. d. B's marginal tax rate is 40 percent, and only $500 of the annual expense is deductible. E N 12. Page 3-22 Firm E must choose between two alternative transactions Transaction requires a $9,000 cash outlay that would be nondeductible in the computation of taxable income. Transaction 2 requires a $13.500 cash outlay that would be a deductible expense. Determine which transaction has 2000 44, ow 360 3640 U

Answer 1

(8)[a} Company P has transaction 1 as taxable and transaction 2 as non taxable

so tranasaction 2 which is non taxable will have no tax and its after tax cash flow = $60000

To get same after tax cash flow as transaction 2 I.e 60000 , transaction 1 which has taxable income $ 100000 will have 40% * as marginal tax rate so $100000*40%= 40000

100000-40000=60000

*(Working we will subtract 100000-60000 =40000 ie 40000/100000×100=40%)

so marginal tax rate = 40%

(8) [b] transaction 2 = $120000 which non taxable

transaction 1 = $ 160000 which is taxable

to get marginal tax rate = $160000-120000

= 40000/160000*100

=25%

so marginal tax rate of 25% will provide same after tax flow

9 statement showing NPV of company N

sr.no	dis rate	amount	year 0	year 1	year 2	year 3	year 4	total amount(npv)	tax rate30	Npv after tax
a	6%	100000	50000	50000/1.06 =47169.81	0			97169.81	30%	68018.867
b	4%	100000		50000/1.04=47169.81	50000/1.04*1.04=46227.81			93397.62	40%	56038.572
c	9%	100000	20000	20000/1.09=18348.62	20000/1.09*1.09=16833.60	20000/1.09^3=15443.67	20000/1.09^4=14168.52	84794.41	10%	76314.97

10 (a) 65000 *8%=5200

tax payer y will have $ 5200 tax free income

net cash flow= $5200

(b) 65000*8%= 5200

tax rate=30%

net cas flow = 5200-1560

=$3640

11

srno	particulars	int	exp	tax income	tax	net cash flow($)
a	100000*9%	9000	0	9000	10	(9000-10%)=8100
b	100000*9%	9000	825	=9000-825=8175	35	8175-2861.25=5313.75
c	100000*9%	9000	0	9000	25	(9000-25%)=6750
d	100000*9%	9000	500	8500	40	(8500-40%)=5100

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