Question

Shirt zu u zt 6 1200 . Company Khas a $4.000 loss before considering the additional deduction 8. Company P must choose between two alternate transactions. The cash generated by Transaction 1 is taxable, and the cash generated by Transaction 2 is nontaxable. Determine the marginal tax rate at which the after-tax cash flows from the two transactions are equal assuming that: 3. Transaction 1 generates $100,000 of income and Transaction 2 generates $60,000 of income. b. Transaction 1 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: 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. e. 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. Jau 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 22000 44, ow goo 360 3640

Answer 1

Question 8)

Transaction 1 is taxable, Transaction 2 is not taxable

Therefore the after-tax cash flow of transaction 2 does not change as it is not taxable. The tax rate at which the after-tax cash

flows of both the transactions can calculated in the following manner by using simple equations,

Case a) Transaction 1 generates $100,000 and Transaction 2 generates $60,000 of cash flows before taxation.

Let us assume tax rate be 'T'. Therefore after tax cash flow of transaction 1 will be $100,000 - (100,000 x T)

The after tax cash flow of transaction 2 will be still 60,000

By equating both the after tax cash flows; 100,000 - 100,000T = 60,000

Solving the above, T = 0.4 or 40%

Therefore the tax rate at which both transactions' after tax cash flows are equal is 40%

Case b) Transaction 1 generates $160,000 and transaction 2 generates $120,000

Here, 160,000 - (160,000 x T) = 120,000

This will result the value of T at 0.25 or 25%

Therefore the tax rate at which both transactions' after tax cash flows are equal is 25%.

Question 9)

a)

Year	Cashflows	Tax Rate	Cash flows after tax	Discounting factor @ 6%	Present value of CFAT
0	$        50,000	30%	$                        35,000	1.000	$                             35,000
1	$        50,000	30%	$                        35,000	0.943	$                             33,019
NPV					$                             68,019

b)

Year	Cashflows	Tax Rate	Cash flows after tax	Discounting factor @ 4%	Present value of CFAT
1	$        50,000	40%	$                        30,000	0.962	$                             28,846
2	$        50,000	40%	$                        30,000	0.925	$                             27,737
NPV					$                             56,583

c)

Year	Cashflows	Tax Rate	Cash flows after tax	Discounting factor @ 9%	Present value of CFAT
0	$        20,000	10%	$                        18,000	1.000	$                             18,000
1	$        20,000	10%	$                        18,000	0.917	$                             16,514
2	$        20,000	10%	$                        18,000	0.842	$                             15,150
3	$        20,000	10%	$                        18,000	0.772	$                             13,899
4	$        20,000	10%	$                        18,000	0.708	$                             12,752
NPV					$                             76,315

Notes:

CFAT: Cash flows after tax

Discounting factors are arrived by using following formula:

Discounting factor = 1 / (1+r)^n where r is the rate of discount and n is the number of years.