Mr. and Mrs. Rath invested in a business that will generate the following cash flows over a three-year period. $\begin{array}{lccc}
&\text { Year0}&\text { Year1}&\text { Year 2}\
\text { Taxable revenue } & 30,000 & 40,000 & 60,000 \
\text { Deductible expenses } & (15,000) & (15,000) & (20,000
\end{array}$
If the Raths' marginal tax rate over the three-year period is 20% and they use a 6% discount rate, compute the NPV of the transaction using the appropriate present value tables in Appendix A.

Question

Mr. and Mrs. Rath invested in a business that will generate the following cash flows over a three-year period. $\begin{array}{lccc}
&\text { Year0}&\text { Year1}&\text { Year 2}\ 
\text { Taxable revenue } & 30,000 & 40,000 & 60,000 \
\text { Deductible expenses } & (15,000) & (15,000) & (20,000
\end{array}$
 If the Raths' marginal tax rate over the three-year period is 20% and they use a 6% discount rate, compute the NPV of the transaction using the appropriate present value tables in Appendix A.

Quizplus · Accepted Answer

The NPV is $59,340. The present value of the cash flows is $74,176, and the initial investment is $14,836. Therefore, the NPV is $74,176 - $14,836 = $59,340.

Mr and Mrs If the Raths' Marginal Tax Rate Over the Three-Year Period