Principles Of Taxation For Business And Investment Planning 2020 Edition
23rd Edition
ISBN: 9781259969546
Author: Sally Jones, Shelley C. Rhoades-Catanach, Sandra R Callaghan
Publisher: McGraw-Hill Education
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Chapter 4, Problem 14AP
To determine
Determine if Firm W would operate the new business directly or through Entity N under given situation.
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Firm Z, a corporation with a 21 percent tax rate, has $100,000 to invest in year 0 and two investment choices. Investment 1 will generate $12,000 taxable cash flow annually for years 1 through 5. In year 5, the firm can sell the investment for $100,000. Investment 2 will not generate any taxable income or cash flow in years 1 through 5, but in year 5, the firm can sell Investment 2 for $165,000.
Assuming a 6 percent discount rate, which investment has the greater NPV?
Would your answer change if Firm Z were a noncorporate taxpayer with a 35 percent tax rate and the gain on sale of Investment 2 were eligible for the 15 percent capital gains rate?
A small corporation is expecting an annual taxable income of $45,000 for itstax year. It is considering an additional capital investment of $100,000 in anengineering project, which is expected to create an added annual net cash flow (revenues minus expenses) of $35,000 and an added annual depreciation deduction of $20,000. What is the corporation’s federal income tax liability(a) without the added capital investment, (b) with the added capital investment?
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.
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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…
Chapter 4 Solutions
Principles Of Taxation For Business And Investment Planning 2020 Edition
Ch. 4 - Prob. 1QPDCh. 4 - Mrs. K is about to begin a new business activity...Ch. 4 - Prob. 3QPDCh. 4 - On the basis of the discussion in this chapter and...Ch. 4 - Prob. 5QPDCh. 4 - Why do income shifts and deduction shifts usually...Ch. 4 - Prob. 7QPDCh. 4 - Prob. 8QPDCh. 4 - Prob. 9QPDCh. 4 - Prob. 10QPD
Ch. 4 - Identify the reasons why managers should evaluate...Ch. 4 - Prob. 12QPDCh. 4 - Prob. 13QPDCh. 4 - Prob. 14QPDCh. 4 - Using the 2019 corporate tax rate: a. What are the...Ch. 4 - Refer to the individual rate schedules in Appendix...Ch. 4 - Refer to the individual rate schedules in Appendix...Ch. 4 - Ms. JK recently made a gift to her 19-year-old...Ch. 4 - Firm A has a 21 percent marginal tax rate, and...Ch. 4 - Prob. 6APCh. 4 - Prob. 7APCh. 4 - Firm M and Firm N are related parties. For the...Ch. 4 - Company K has a 30 percent marginal tax rate and...Ch. 4 - Firm H has the opportunity to engage in a...Ch. 4 - What is the effect on the NPV of the restructured...Ch. 4 - French Corporation wishes to hire Leslie as a...Ch. 4 - Corporation R signed a contract to undertake a...Ch. 4 - Prob. 14APCh. 4 - Lardo Inc. plans to build a new manufacturing...Ch. 4 - Prob. 16APCh. 4 - Prob. 17APCh. 4 - Prob. 18APCh. 4 - Prob. 19APCh. 4 - Prob. 20APCh. 4 - Refer to the facts in the preceding problem. At...Ch. 4 - For each of the following scenarios, indicate...Ch. 4 - Assume that Congress amends the tax law to provide...Ch. 4 - Firm L has 500,000 to invest and is considering...Ch. 4 - Prob. 1IRPCh. 4 - Mr. and Mrs. K own rental property that generates...Ch. 4 - Prob. 3IRPCh. 4 - Prob. 4IRPCh. 4 - Prob. 5IRPCh. 4 - Prob. 6IRPCh. 4 - Prob. 7IRPCh. 4 - Firm HR is about to implement an aggressive...Ch. 4 - Prob. 1TPCCh. 4 - Prob. 2TPCCh. 4 - Prob. 3TPCCh. 4 - Ms. Z has decided to invest 75,000 in state bonds....
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