Question

Firm X has the opportunity to invest $288,000 in a new venture. The projected cash flows from the venture are as follows. Use Appendix A and Appendix B. Year 1 Year 2 Year 3 Year e Initial investment $(288,000) $ 57,800 (34,680) $ 57,800 (8,670) 288,800 $337,130 $57,800 (8,670) Revenues Expenses Return of investment (288,000) $ 23,120 Before-tax net cash flow $49,130 Firm X uses an 8 percent discount rate, and its marginal tax rate over the life of the venture will be 35 percent. a-1. Complete the below table to calculate NPV. Assume that the revenues are taxable income, and the expenses are deductible. a-2. Should firm X make the investment? b-1. Complete the below table to calculate NPV. Assume that the revenues are taxable income, but the expenses are nondeductible. b-2. Should firm X make the investment? Complete this question by entering your answers in the tabs below. Req A1 Req A2 Req B1 Req B2 Complete the below table to calculate NPV. Assume that the revenues are taxable income, and the expenses are deductible. (Cash outflows and negative amount should be indicated by a minus sign. Round discount factor(s) to 3 decimal places, all other intermediate calculations and final answers to the nearest whole dollar amount.) Year 0 Year 1 Year 2 Year 3 Before-tax cash flow 23,120 (288,000) 49,130 337,130

Answer 1

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Firm X
Answer a 1
Particulars	Y0	Y1	Y2	Y3	Total	Note
Initial Investment	(288,000.00)	-	-	-		A
Return of Investment	-	-	-	288,000.00		B
Revenues	-	57,800.00	57,800.00	57,800.00		C
Expenses	-	(34,680.00)	(8,670.00)	(8,670.00)		D
Net Profit	-	23,120.00	49,130.00	49,130.00		E=C+D
Tax at 35%	-	8,092.00	17,195.50	17,195.50		F=E*35%
Profit after tax		15,028.00	31,934.50	31,934.50		G=E-F
Net cash flows	(288,000.00)	15,028.00	31,934.50	319,934.50		H=A+B+G
PV factor at 8%	1.00	0.92593	0.85734	0.79383		I
Present Value	(288,000.00)	13,915.00	27,379.00	253,974.00	7,268.00	J=H*I
NPV is $ 7,268.
Answer a 2
As NPV is positive so it should be accepted.
Firm X
Answer a 3
Particulars	Y0	Y1	Y2	Y3	Total	Note
Initial Investment	(288,000.00)	-	-	-		A
Return of Investment	-	-	-	288,000.00		B
Revenues	-	57,800.00	57,800.00	57,800.00		C
Tax at 35%	-	20,230.00	20,230.00	20,230.00		D=C*35%
After tax Revenues	-	37,570.00	37,570.00	37,570.00		E=C-D
Less: Expenses	-	(34,680.00)	(8,670.00)	(8,670.00)		F
Net cash flows	(288,000.00)	2,890.00	28,900.00	316,900.00		G=E+F+B+A
PV factor at 8%	1.00	0.92593	0.85734	0.79383		H
Present Value	(288,000.00)	2,676.00	24,777.00	251,565.00	(8,982.00)	I=G*H
NPV is negative $ 8,982.
Answer a 4
As NPV is negative so it should not be accepted.