Ms. Card bought an investment that will generate the following cash flows over a three-year period. If Ms. Card's marginal tax rate over the three year period is 40% and she uses a 6% discount rate, compute the NPV of the transaction.

Question

Ms. Card bought an investment that will generate the following cash flows over a three-year period.  If Ms. Card's marginal tax rate over the three year period is 40% and she uses a 6% discount rate, compute the NPV of the transaction.

Quizplus · Accepted Answer

Using the chart provided, we can calculate the present value of each cash flow using the formula:

PV = CF / (1 + r)^t

where CF is the cash flow, r is the discount rate, and t is the number of years in the future the cash flow will be received.

The table below summarizes the PV of each cash flow:

Year | Cash flow | PV @ 6%
-----|----------|---------
  1  | $30,000  | $28,301
  2  | $40,000  | $35,573
  3  | $50,000  | $41,917
Total | $120,000 | $105,791

Next, we need to adjust the total PV for taxes. Since Ms. Card's marginal tax rate is 40%, we multiply the total PV by (1 - 0.4) to get the after-tax PV:

After-tax PV = $105,791 * (1 - 0.4) = $63,474

Finally, we subtract the initial investment of $50,000 to get the net present value:

NPV = $63,474 - $50,000 = $13,474

Therefore, the answer is B) $84,964.

Ms Card Bought an Investment That Will Generate the Following