Mrs. Biggs invested in a business that will generate the following cash flows over a three-year period. 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.  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

To calculate NPV, we need to discount each cash flow back to its present value and then sum them up.

Year 1: $30,000 / (1+0.06)^1 = $28,301.89
Year 2: $40,000 / (1+0.06)^2 = $35,478.10
Year 3: $50,000 / (1+0.06)^3 = $41,410.28

NPV = $28,301.89 + $35,478.10 + $41,410.28 - Initial Investment
NPV = $105,190.27 - $57,408.60
NPV = $47,781.67

So, the correct answer is option C, $47,781.

Mrs Biggs Invested in a Business That Will Generate the Following