Corporation VB was formed in 2018. Immediately prior to year end, VB is consider
ID: 2815329 • Letter: C
Question
Corporation VB was formed in 2018. Immediately prior to year end, VB is considering a $500,000 deductible expenditure. It can either make the expenditure before the end of 2018, or wait until 2019. However, if it waits the cost of the expenditure will increase to $525,000. Before considering this expenditure, VB has the following projected pre-tax cash flows and taxable income for 2018, 2019, and 2020. Use Appendix A.
Using a 5 percent discount rate, compute the NPV of VB's after-tax cashflows if the expenditure is in 2018.
Using a 5 percent discount rate, compute the NPV of VB's after-tax cashflows if the expenditure is in 2019.
Based on your calculations, when should VB make this expenditure?
2018 2019 2020 Taxable income andpre-tax cashflow $ 120,000 $ 400,000 $ 700,000
Explanation / Answer
Answer 1 Calculation of the NPV of VB's after-tax cashflows if the expenditure is in 2018. Year 0 2018 2019 2020 NPV Expenditure -$500,000.00 Pre-tax cash flows $120,000.00 $400,000.00 $700,000.00 Net Cash Flows -$500,000.00 $120,000.00 $400,000.00 $700,000.00 x Discount Factor @ 5% 1 0.952380952 0.90702948 0.8638376 Present Values -$500,000.00 $114,285.71 $362,811.79 $604,686.32 $581,783.82 Answer 2 Calculation of the NPV of VB's after-tax cashflows if the expenditure is in 2019 Year 0 2018 2019 2020 NPV Expenditure -$525,000.00 Pre-tax cash flows $120,000.00 $400,000.00 $700,000.00 Net Cash Flows $0.00 -$405,000.00 $400,000.00 $700,000.00 x Discount Factor @ 5% 1 0.952380952 0.90702948 0.8638376 Present Values $0.00 -$385,714.29 $362,811.79 $604,686.32 $581,783.82 As the NPV of both the option is same , VB can make expenditure either in 2018 or 2019.