Question

Firm X has the opportunity to invest $200,000 in a new venture. The projected cash flows from the venture are as follows. Use Appendix A and Appendix B. Year 0 Year 1 Year 2 Year 3 Initial investment $ (200,000 ) Revenues $ 40,000 $ 40,000 $ 40,000 Expenses (25,000 ) (7,000 ) (7,000 ) Return of investment 200,000 Before-tax net cash flow (200,000 ) $ 15,000 $ 33,000 $ 233,000 Firm X uses an 8 percent discount rate, and its marginal tax rate over the life of the venture will be 35 percent. Required: a-1. Complete the below table to calculate NPV. Assume that the revenues are taxable income, and the expenses are deductible. a-2. Should firm X make the investment? b-1. Complete the below table to calculate NPV. Assume that the revenues are taxable income, but the expenses are nondeductible. b-2. Should firm X make the investment?

Answer 1

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