Firm W, which has a 30 percent marginal tax rate, plans to operate a new business that should generate $58,000 annual cash flow and ordinary income for three years (years 0, 1, and 2). Alternatively, Firm W could form a new taxable entity (Entity N) to operate the business. Entity N would pay tax on the three-year income stream at a 20 percent rate. The nondeductible cost of forming Entity N would be $6,800. Firm W uses a 5 percent discount rate. Use Appendix A and Appendix B. Required: a. Complete the below tables to calculate NPV. b. Should it operate the new business directly or form Entity N to operate the business? Complete this question by entering your answers in the tabs below. Show Transcribed Text Required A Required B Answer is not complete. Complete this question by entering your answers in the tabs below. Business operated by Firm W: After-tax cash flow at 30% tax rate Discount factor (5%) Present value Complete the below tables to calculate NPV. Note: Cash outflows should be indicated by a minus sign. Round discount factors to 3 decimal places. Round intermediate calculations and final answers to the nearest whole dollar amount. NPV Business operated by Entity N: After-tax cash flow at 20% tax rate Cost of forming Entity N Net cash flow Discount factor (5%) Present value NPV $ Answer is not complete. $ $ $ $ Year 0 2,040 2,040 $ 17,400 $ 55,238.100 X $ 0 0 85,671 X $ C Year 1 961,142,940 $ Year 2 0 $ 58,000 52,416.270 X 3,040,143,660 Required B > 0
Firm W, which has a 30 percent marginal tax rate, plans to operate a new business that should generate $58,000 annual cash flow and ordinary income for three years (years 0, 1, and 2). Alternatively, Firm W could form a new taxable entity (Entity N) to operate the business. Entity N would pay tax on the three-year income stream at a 20 percent rate. The nondeductible cost of forming Entity N would be $6,800. Firm W uses a 5 percent discount rate. Use Appendix A and Appendix B. Required: a. Complete the below tables to calculate NPV. b. Should it operate the new business directly or form Entity N to operate the business? Complete this question by entering your answers in the tabs below. Show Transcribed Text Required A Required B Answer is not complete. Complete this question by entering your answers in the tabs below. Business operated by Firm W: After-tax cash flow at 30% tax rate Discount factor (5%) Present value Complete the below tables to calculate NPV. Note: Cash outflows should be indicated by a minus sign. Round discount factors to 3 decimal places. Round intermediate calculations and final answers to the nearest whole dollar amount. NPV Business operated by Entity N: After-tax cash flow at 20% tax rate Cost of forming Entity N Net cash flow Discount factor (5%) Present value NPV $ Answer is not complete. $ $ $ $ Year 0 2,040 2,040 $ 17,400 $ 55,238.100 X $ 0 0 85,671 X $ C Year 1 961,142,940 $ Year 2 0 $ 58,000 52,416.270 X 3,040,143,660 Required B > 0
Chapter18: Corporations: Organization And Capital Structure
Section: Chapter Questions
Problem 38P
Related questions
Question
Transcribed Image Text:Firm W, which has a 30 percent marginal tax rate, plans to operate a new business that should generate $58,000 annual cash flow and
ordinary income for three years (years 0, 1, and 2). Alternatively, Firm W could form a new taxable entity (Entity N) to operate the
business. Entity N would pay tax on the three-year income stream at a 20 percent rate. The nondeductible cost of forming Entity N
would be $6,800. Firm W uses a 5 percent discount rate. Use Appendix A and Appendix B.
Required:
a. Complete the below tables to calculate NPV.
b. Should it operate the new business directly or form Entity N to operate the business?
Complete this question by entering your answers in the tabs below.
Show Transcribed Text
Required A Required B
Complete this question by entering your answers in the tabs below.
Business operated by Firm W:
After-tax cash flow at 30% tax rate
Discount factor (5%)
Present value
NPV
Business operated by Entity N:
After-tax cash flow at 20% tax rate
Cost of forming Entity N
Net cash flow
Discount factor (5%)
Present value
NPV
Answer is not complete.
$
$
Complete the below tables to calculate NPV.
Note: Cash outflows should be indicated by a minus sign. Round discount factors to 3 decimal places. Round intermediate
calculations and final answers to the nearest whole dollar amount.
$
$
Answer is not complete.
Year 0
2,040 × $
2,040
0
S
0
85,671 X
$
$
Year 1
17,400 $
55,238.100 X
$
961,142,940
The
Year 2
0 $
58,000x
52,416.270X
CENT
3,040,143,660
Required B >
0
ALITO
ਸੰਤ ਕਰ
ENG DE AL
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