chapter 3

$20,000 received annually at the end of years 1 through 5 followed by $13,000 received annually at the end of years 6 through 10. The discount rate is 15 percent.

($20,000 × 3.352 discount factor) + 0.497 discount factor ($13,000 × 3.352 discount factor) = $88,697

$3,400 received annually at the end of each of the next 15 years. The discount rate is 9 percent.

$3,400 × 8.061 discount factor = $27,407

Firm E must choose between two alternative transactions. Transaction 1 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. a. Determine the after-tax cost for each transaction. Assume Firm E's marginal tax rate is 20 percent. b. Determine the after-tax cost for each transaction. Assume Firm E's marginal tax rate is 40 percent.

a. T1: (9,000), T2: (10,800) b. T1: (9,000), T2: (8,100)

A 10-year annuity of $5,000 per annum. The first $5,000 payment is due immediately. The discount rate is 6 percent.

$5,000 + ($5,000 × 6.802 discount factor for 9 periods) = $39,010

$89,000 received at the end of six years. The discount rate is 4 percent.

$89,000 × 0.790 discount factor = $70,310

Corporation ABC invested in a project that will generate $60,000 annual after-tax cash flow in years 0 and 1 and $40,000 annual after-tax cash flow in years 2, 3, and 4. Use Appendix A and Appendix B. a. Compute the NPV of these cash flows assuming that ABC uses a 10 percent discount rate. b. Compute the NPV of these cash flows assuming that ABC uses a 7 percent discount rate. c. Compute the NPV of these cash flows assuming that ABC uses a 4 percent discount rate.

a. $60,000 + 0.909($60,000) + 0.826($40,000) + 0.751($40,000) + 0.683($40,000) = $204,940 b. $60,000 + 0.935($60,000) + 0.873($40,000) + 0.816($40,000) + 0.763($40,000) = $214,180 c. $60,000 + 0.962($60,000) + 0.925($40,000) + 0.889($40,000) + 0.855($40,000) = $224,480

Business J operates in a jurisdiction that levies an income tax with the following rate structure: Percentage Rate Bracket 7% Income from -0- to $75,000 10 Income from $75,001 to $150,000 15 Income in excess of $150,000 Business J has the opportunity to invest in a project that should generate $35,000 additional taxable income for the year. a. Compute the tax cost of the additional income assuming that business J's taxable income before considering the additional income is $92,000. b. Compute the tax cost of the additional income assuming that business J's taxable income before considering the additional income is $400,000. c. Compute the tax cost of the additional income assuming that business J has a $16,000 loss before considering the additional income.

a. Tax cost of the additional income is $3,500 ($35,000 × 10% marginal rate.) b. Tax cost of the additional income is $5,250 ($35,000 × 15% marginal rate.) c. Tax cost of the additional income is $1,330 ($19,000 [$35,000 - $16,000 loss] × 7% marginal rate.)

Company K operates in a jurisdiction that levies an income tax with the following rate structure: Percentage Rate Bracket 7% Income from -0- to $75,000 10 Income from $75,001 to $150,000 15 Income in excess of $150,000 Company K incurs a $22,000 deductible expense. a. Compute the current year tax savings from the deduction assuming that Company K's taxable income before considering the additional deduction is $65,000. b. Compute the current year tax savings from the deduction assuming that Company K's taxable income before considering the additional deduction is $168,000. c. Compute the current year tax savings from the deduction assuming that Company K has a $4,000 loss before considering the additional deduction.

a. Tax savings from the deduction is $1,540 ($22,000 × 7% marginal rate.) b. Tax savings from the deduction is $3,100 ([$18,000 × 15% marginal rate] + [$4,000 × 10% marginal rate]). c. Tax savings from the deduction is zero.