Mr. and Mrs. Rath invested in a business that will generate the following cash flows over a three-year period. $$\begin{array} { | l | c | c | c | }
\hline & \text { Year } 0 & \text { Year } 1 & \text { Year Z } \
\hline \text { Teyeble revenue } & 30,000 & 4 0 , 000 & 60,000 \
\hline \text { Deductible expenter } & ( 15,000 ) & ( 15,000 ) & \text { (20,000) } \
\hline
\end{array}$$ 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.

Question

Mr. and Mrs. Rath invested in a business that will generate the following cash flows over a three-year period. $$\begin{array} { | l | c | c | c | } 
\hline & \text { Year } 0 & \text { Year } 1 & \text { Year Z } \
\hline \text { Teyeble revenue } & 30,000 & 4 0 , 000 & 60,000 \
\hline \text { Deductible expenter } & ( 15,000 ) & ( 15,000 ) & \text { (20,000) } \
\hline
\end{array}$$ 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.

Quizplus · Accepted Answer

The correct answer is A. The NPV of the transaction is $59,340. This is calculated by taking the present value of the cash flows over the three-year period and subtracting the initial investment. The present value of the cash flows is calculated by multiplying each cash flow by the present value factor for the corresponding year. The present value factor is calculated by dividing 1 by (1 + r)^n, where r is the discount rate and n is the number of years. In this case, the discount rate is 6% and the number of years is 3. The present value of the cash flows is $59,340. The initial investment is $30,000. Therefore, the NPV of the transaction is $59,340 - $30,000 = $29,340.

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