Mrs. Biggs invested in a business that will generate the following cash flows over a three-year period. $\begin{array}{lccc}
& \text { Year } 0 & \text { Year } & \text { Year 2 } \
\text { Taxable revenue } & 30,000 & 45,000 & 70,000 \
\text { Deductible expenses } & (15,000) & (15,000) & (20,000) \
\text { Nondeductible expenses } & (1,000) & (4,000) & (10,000)
\end{array}$
If Mrs. Biggs' marginal tax rate over the three-year period is 30% and she uses a 6% discount rate, compute the NPV of the transaction using the appropriate present value tables in Appendix A.

Question

Mrs. Biggs invested in a business that will generate the following cash flows over a three-year period. $\begin{array}{lccc}
& \text { Year } 0 & \text { Year } & \text { Year 2 } \
\text { Taxable revenue } & 30,000 & 45,000 & 70,000 \
\text { Deductible expenses } & (15,000) & (15,000) & (20,000) \
\text { Nondeductible expenses } & (1,000) & (4,000) & (10,000)
\end{array}$
 If Mrs. Biggs' marginal tax rate over the three-year period is 30% and she uses 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 calculated by finding the present value of after-tax cash flows for each year and summing them. After-tax cash flows are calculated by subtracting deductible expenses from taxable revenue, applying the tax rate, and then subtracting nondeductible expenses. The present value is then found using the discount rate of 6%.

Mrs Biggs Invested in a Business That Will Generate the Following