Question

ime Left:0:12:24 es Respondus LockDown Browser + Webcam Qlfan Wu: Attempt 1 Next Page Page 22 of 25 Question 22 (6 points) Mr. West has the choice between two transactions. Transaction A will generate $500,000 taxable cash flow in the current year (year O). Transaction B will generate $460,000 cash flow in the current year, but Mr. West will not be required to report $460,000 income until next year (year 1). Mr. West has a 40% marginal tax rate and uses a 10% discount rate to compute NPV. Using the following: PV $1 at 10% where n=1 (.909); n=2 (.826); n=3 (.751), determine which of the following statements is true? Mr. West should choose transaction A because it generates more before-tax cash flow. Mr. West should choose transaction B because the tax cost is deferred one year Mr. West should choose transaction A because its NPV exceeds transaction B's NPV. Mr. West should choose transaction B because its NPV exceeds transaction A NPV. F10 F9 F8 F7 C ES FO

Answer 1

Transaction A Taxable Value less: Tax @ 40% Net Present Value (A) $ $ $ 5,00,000 2,00,000 3,00,000 Transaction B Taxable Value Tax @ 40% $ $ 4,60,000 1,84,000 Net Present Value : Cash Inflow PV of Tax @ 0.909 Net Present Value (B) $ $ $ 4,60,000 1,67,256 2,92,744 As the NPV of A is more than NPV of B, Transaction A should be chosen Answer: C) Mr. West should choose transaction A because its NPV exceeds transaction B's NPV.

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