Generally Accepted Accounting Principles Essay

11. a. yr 0 socio-economic class 1 year 2 form 3 course 4Before- revenue cash consort $(500,000) $52,500 $47,500 $35,500 $530,500 assessation embody (7,875) (7,125) (5,325) (4,575)After-tax cash current 44,625 40,375 30,175 525,925 synthesis instrument (7%) .935 .873 .816 .763 face up entertain $(500,000) $41,724 $35,247 $24,623 $401,281NPV $2,875Investor W should make the investment funds because NPV is positive.b. class 0 class 1 socio-economic class 2 Year 3 Year 4Before-tax cash feed in $(500,000) $52,500 $47,500 $35,500 $530,500 evaluate cost (10,500) (9,500) (7,100) (6,100) After-tax cash hunt 42,000 38,000 28,400 524,400 bank discount means (7%) .935 .873 .816 .763 introduce nurse $(500,000) $39,270 $33,174 $23,174 $400,117NPV $(4,265)Investor W should not make the investment because NPV is negative.c. Year 0 Year 1 Year 2 Year 3 Year 4Before-tax cash flow $(500,000) $52,500 $47,500 $35,500 $530,500 task cost (5,250) (4,750) (8,875) (7,625) After-tax cash flow 47,250 42,750 26,625 522,875 tax write-off portion (7%) .935 .873 .816 .763Present value $(500,000) $44,179 $37,321 $21,726 $398,954NPV $2,180Investor W should make the investment because NPV is positive.16. a. probability 1 Year 0 Year 1 Year 2 dutiable income (loss) $(8,000) $5,000 $20,000 peripheral tax rate .40 .40 .40Tax $(3,200) $2,000 $8,000Before-tax cash flow $(8,000) $5,000 $20,000Tax (cost) or savings 3,200(2,000) (8,000) send away cash flow $(4,800) $3,000 $12,000Discount factor (12%) .893 .797Present value $(4,800) $2,679 $9,564NPV $7,443Opportunity 2 Year 0 Year 1 Year 2Taxable income $5,000 $5,000 $5,000 peripheral tax rate .40 .40 .40Tax $2,000 $2,000 $2,000Before-tax cash flow $5,000 $5,000 $5,000Tax (cost) or savings (2,000) (2,000) (2,000) crystallize cash flow $3,000 $3,000 $3,000Discount factor (12%) .893 .797Present value $3,050 $2,679 $2,391NPV $8,120 stiff E should choose opportunity 2.b. Opportunity 1 Year 0 Year 1 Year 2Taxable income (loss) $(8, 000) $5,000 $20,000Marginal tax rate .15 .15 .15Tax $(1,200) $750 $3,000Before-tax cash flow $(8,000) $5,000 $20,000Tax (cost) or savings 1,200 (750) (3,000)Net cash flow $(6,800) $4,250 $17,000Discount factor (12%) .893 .797Present value $(6,800) $3,795 $13,549NPV $10,544Opportunity 2 Year 0 Year 1 Year 2Taxable income $5,000 $5,000 $5,000Marginal tax rate .15 .15 .15Tax $750 $750 $750Before-tax cash flow $5,000 $5,000 $5,000Tax (cost) or savings (750) (750) (750)Net cash flow $4,250 $4,250 $4,250Discount factor (12%) .893 .797Present value $4,250 $3,795 $3,387NPV $11,432Firm E should choose opportunity 2.c. Opportunity 1 Year 0 Year 1 Year 2Taxable income (loss) $(8,000) $5,000 $20,000Marginal tax rate .40 .15 .15Tax $(3,200) $750 $3,000Before-tax cash flow $(8,000) $5,000 $20,000Tax (cost) or savings 3,200 (750) (3,000)Net cash flow $(4,800) $4,250 $17,000Discount factor (12%) .893 .797Present value $(4,800) $3,795 $13,549NPV $12,544Opportunity 2 Year 0 Year 1 Year 2Taxable incom e $5,000 $5,000 $5,000Marginal tax rate .40 .15 .15Tax $2,000 $750 $750Before-tax cash flow $5,000 $5,000 $5,000Tax (cost) or savings (2,000) (750) (750)Net cash flow $3,000 $4,250 $4,250Discount factor (12%) .893 .797Present value $3,000 $3,795 $3,387NPV $10,182Firm E should choose opportunity 1.1. a. (1) Year 0 Year 1 Year 2Before-tax stipend/income $80,000 $80,000 $80,000Marginal tax rate .25 .40 .40Tax on income $20,000 $32,000 $32,000After-tax cash flow $60,000 $48,000 $48,000Discount factor (8%) .926 .857Present value $60,000 $44,448 $41,136NPV of salary received by Mrs. X $145,584(2) Before-tax payment /deduction $80,000 $80,000 $80,000Marginal tax rate .34 .34 .34Tax savings from deduction $27,200 $27,200 $27,200After-tax cost $(52,800) $(52,800) $(52,800)Discount factor (8%) .926 .857Present value $(52,800) $(48,893) $(45,250)NPV of salary cost to Firm B $(146,943)b. (1) Year 0 Year 1 Year 2Before-tax salary/income $140,000 $50,000 $50,000Marginal tax rate .25 .40 .40Tax o n income $35,000 $20,000 $20,000After-tax cash flow $105,000 $30,000 $30,000Discount factor (8%) .926 .857Present value $105,000 $27,780 $25,710NPV of salary received by Mrs. X $158,490(2) Before-tax payment /deduction $140,000 $50,000 $50,000Marginal tax rate .34 .34 .34Tax savings from deduction $47,600 $17,000 $17,000After-tax cost $(92,400) $(33,000) $(33,000)Discount factor (8%) .926 .857Present value $(92,400) $(30,558) $(28,281)NPV of salary cost to Firm B $(151,239)c. Year 0 Year 1 Year 2Before-tax payment /deduction $140,000 $45,000 $45,000Marginal tax rate .34 .34 .34Tax savings from deduction $47,600 $15,300 $15,300After-tax cost $(92,400) $(29,700) $(29,700)Discount factor (8%) .926 .857Present value $(92,400) $(27,502) $(25,423)NPV of salary cost to Firm B $(145,325)This suggestion is superior (has less cost) to Firm B than its trustworthy offer.d. Year 0 Year 1 Year 2Before-tax salary/income $140,000 $45,000 $45,000Marginal tax rate .25 .40 .40Tax on income $35,000 $ 18,000 $18,000After-tax cash flow $105,000 $27,000 $27,000Discount factor (8%) .926 .857Present value $105,000 $25,002 $23,139NPV of salary received by Mrs. X $153,141Mrs. X should accept this counterproposal because it hasa greater NPV than Firm Bs original offer.