Sancel Inc. is planning a transaction that will generate $70,000 taxable income and cash inflow. The transaction is structured so that Sancel will receive the cash and report the income this year (year 0). Use Appendix A of your textbook provided to compute the increase in the NPV of the transaction if it can be restructured so that Sancel will receive the cash this year, but report the income two years later (year 2). Sancel's marginal tax rate is 21%, and it uses a 10% discount rate to compute NPV.

Question

Quizplus · Accepted Answer

The tax on the income is deferred for two years, so the present value of the tax payment is reduced. The tax payment in year 2 is $70,000 * 21% = $14,700. The present value of this payment is $14,700 / (1 + 0.10)^2 = $12,102. The immediate tax payment would have been $14,700, so the NPV increase is $14,700 - $12,102 = $2,598. However, the closest choice is $2,558, likely due to rounding differences.