Mrs. Biggs invested in a business that will generate the following cash flows over a three-year period. $$\begin{array} { | l | c | c | c | }
\hline & \text { Year } 0 & \text { Year } 1 & \text { Year } ~ \
\hline \text { Taxeble revenue } & 30,000 & 45,000 & 70,000 \
\hline \text { Deductible expenses } & ( 15,000 ) & ( 15,000 ) & \text { (20,000) } \
\hline \text { Nandeductible expenses } & ( 1,000 ) & ( 4,000 ) & \text { (10,000) } \
\hline
\end{array}$$ 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.

Question

Mrs. Biggs invested in a business that will generate the following cash flows over a three-year period. $$\begin{array} { | l | c | c | c | } 
\hline & \text { Year } 0 & \text { Year } 1 & \text { Year } ~ \
\hline \text { Taxeble revenue } & 30,000 & 45,000 & 70,000 \
\hline \text { Deductible expenses } & ( 15,000 ) & ( 15,000 ) & \text { (20,000) } \
\hline \text { Nandeductible expenses } & ( 1,000 ) & ( 4,000 ) & \text { (10,000) } \
\hline
\end{array}$$ 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.

Quizplus · Accepted Answer

The NPV is calculated by finding the after-tax cash flows for each year, discounting them to present value using the 6% discount rate, and summing them up. The after-tax cash flow is calculated by subtracting deductible expenses from taxable revenue, applying the tax rate, and then adding back non-deductible expenses.

Mrs Biggs Invested in a Business That Will Generate the Following