Corporation VB was formed in 2019. Immediately prior to year-end, VB is considering a $500,000...
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Corporation VB was formed in 2019. Immediately prior to year-end, VB is considering a $500,000 deductible expenditure. It can either make the expenditure before the end of 2019, or wait until 2020. 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 2019, 2020, and 2021. Use Appendix A.
| 2019 | 2020 | 2021 | |||||||
| Taxable income and pre-tax cashflow | $ | 120,000 | $ | 400,000 | $ | 700,000 | |||
- Using a 5 percent discount rate, compute the NPV of VB's after-tax cash flows if the expenditure is in 2019.
- Using a 5 percent discount rate, compute the NPV of VB's after-tax cash flows if the expenditure is in 2020.
- Based on your calculations, when should VB make this expenditure?
* Tax Rate was not included in problem *
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