Intermediate Managerial and Tax Accounting ACCTG 325 Fall 2024 Exercise 3 Chapter 3, Taxes as Transaction Costs

Intermediate Managerial and Tax

Accounting ACCTG 3

2

5 Fall 2024

Exercise 3

Chapter 3, Taxes as Transaction Costs

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1. Use the present value tables in Appendix A and Appendix B from the textbook to compute the NPV of each of the

following cash outflows:

a. $22,000 paid at the end of 4 years. The discount rate is 5 percent.

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b. $2,000 paid at the end of 3 years and $5,000 paid at the end of 5 years. The discount rate is 8 percent.

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c. $7,000 paid annually at the end of each of the next 4 years. The discount rate is 4 percent.

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d. $1,500 paid annually at the end of each of the next 4 years and $3,000 paid at the end of the fifth year.

The discount rate is 6 percent

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2. Business J operates in a jurisdiction that levies an income tax with the following rate structure:

Business J has the opportunity to invest in a project that should generate $35,000 additional taxable income for

the year.

a. Compute the tax cost of the additional income assuming that business J’s taxable income before

considering the additional income is $92,000.

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b. Compute the tax cost of the additional income assuming that business J’s taxable income before

considering the additional income is $400,000.

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c. Compute the tax cost of the additional income assuming that business J has a $16,000 loss before

considering the additional income.

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3. Company N will receive $90,000 of taxable revenue from a client. Use Appendix A and Appendix B:

a. Compute the NPV of the assuming that Company N will receive $45,000 now (year 0) and $45,000 in

year 1. The company’s marginal tax rate is 30 percent and it uses a 6 percent discount rate.

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b. Compute the NPV of the assuming that Company N will receive $45,000 in year 1 and $45,000 in year 2.

The company’s marginal tax rate is 40 percent and it uses a 4 percent discount rate.

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c. Compute the NPV of the assuming that Company N will receive $18,000 now (year 0) and $18,000 in

years 1, 2, 3, and 4. The company’s marginal tax rate is 10 percent and it uses a 9 percent discount rate.

_____________________________________________________________________________________Intermediate Managerial and Tax

Accounting ACCTG 325, Fall 2024

Exercise 3
Chapter 3, Taxes as Transaction Costs
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4. Firm D is considering investing $400,000 cash in a three-year project with the following cash flows:

The revenue is taxable, the expenses are deductible, and the marginal tax rate is 15 percent. Use a 10 percent

discount rate (Use Appendix A and Appendix B) to compute the total NPV. Show your work. Based on your

result, should Firm D make the investment?