Mr Basel made an investment that will generate the following cash flows over a three-year period. Use Appendix A.
If Mr Basel's marginal tax rate over the three year period is 20% and he uses a 6% discount rate, compute the NPV of the transaction.

Question

Quizplus · Accepted Answer

$\underline{(3,400)}$
$$\begin{array}{l}
\text { The correct NPV is } \$ 32,868 ( \$ 7,600 + \$ 10,939 + \$ 14,329 )\\
\begin{array} { l r r r r } 
& \text { Year 0 } && \text { Year 1 } & \text { Year 2 } \
\text { Taxable income } & 11,000 & & 17,000 & 25,500 \
\text { Tax at 20\% } & \underline{(2,200)} && \underline{(3,400)} & \underline{(5,100)}\
\text { Before-tax cash flow } & 9,800 & & 15,000 & 21,200 \
\text { Tax cost } & ( 2,200 ) & & ( 3,400 ) & ( 5,100 ) \
 \text { After-tax cash flow } & 7,600 & & 11,600 & 16,100 \
\text { Discount factor } & \underline{(0)} & &\underline{(0.943)} & \underline{(0.890)} \
 \text { Discounted cash flow } & 7,600 & & 10,939 & 14,329
\end{array}
\end{array}$$ 
 $$\begin{array} { l c c c } 
& \text { Year 0 } & \text { Year 1 } & \text { Year 2 } \
\text { Taxable revenue } & 16,000 & 23,000 & 33,000 \
\text { Deductible expenses } & ( 5,000 ) & ( 6,000 ) & ( 7,500 ) \
\text { Nondeductible expenses } & ( 1,200 ) & ( 2,000 ) & ( 4,300 )
\end{array}$$

Mr Basel Made an Investment That Will Generate the Following