# Generally Accepted Accounting Principles Essay

Custom Student Mr. Teacher ENG 1001-04 17 April 2016

## Generally Accepted Accounting Principles

11. a. Year 0 Year 1 Year 2 Year 3 Year 4
Before-tax cash flow \$(500,000) \$52,500 \$47,500 \$35,500 \$530,500
Tax cost (7,875) (7,125) (5,325) (4,575)
After-tax cash flow 44,625 40,375 30,175 525,925 Discount factor (7%) .935 .873 .816 .763
Present value \$(500,000) \$41,724 \$35,247 \$24,623 \$401,281
NPV \$2,875
Investor W should make the investment because NPV is positive.

b. Year 0 Year 1 Year 2 Year 3 Year 4
Before-tax cash flow \$(500,000) \$52,500 \$47,500 \$35,500 \$530,500 Tax cost (10,500) (9,500) (7,100) (6,100) After-tax cash flow 42,000 38,000 28,400 524,400 Discount factor (7%) .935 .873 .816 .763

Present value \$(500,000) \$39,270 \$33,174 \$23,174 \$400,117
NPV \$(4,265)
Investor W should not make the investment because NPV is negative.

c. Year 0 Year 1 Year 2 Year 3 Year 4
Before-tax cash flow \$(500,000) \$52,500 \$47,500 \$35,500 \$530,500 Tax cost (5,250) (4,750) (8,875) (7,625) After-tax cash flow 47,250 42,750 26,625 522,875 Discount factor (7%) .935 .873 .816 .763
Present value \$(500,000) \$44,179 \$37,321 \$21,726 \$398,954
NPV \$2,180
Investor W should make the investment because NPV is positive.

16. a. Opportunity 1: Year 0 Year 1 Year 2
Taxable income (loss) \$(8,000) \$5,000 \$20,000
Marginal tax rate .40 .40 .40
Tax \$(3,200) \$2,000 \$8,000
Before-tax cash flow \$(8,000) \$5,000 \$20,000
Tax (cost) or savings 3,200(2,000) (8,000)
Net cash flow \$(4,800) \$3,000 \$12,000
Discount factor (12%) .893 .797
Present value \$(4,800) \$2,679 \$9,564
NPV \$7,443

Opportunity 2: Year 0 Year 1 Year 2
Taxable income \$5,000 \$5,000 \$5,000
Marginal tax rate .40 .40 .40
Tax \$2,000 \$2,000 \$2,000
Before-tax cash flow \$5,000 \$5,000 \$5,000
Tax (cost) or savings (2,000) (2,000) (2,000)
Net cash flow \$3,000 \$3,000 \$3,000
Discount factor (12%) .893 .797
Present value \$3,050 \$2,679 \$2,391
NPV \$8,120
Firm E should choose opportunity 2.

b. Opportunity 1: Year 0 Year 1 Year 2
Taxable income (loss) \$(8,000) \$5,000 \$20,000
Marginal tax rate .15 .15 .15
Tax \$(1,200) \$750 \$3,000
Before-tax cash flow \$(8,000) \$5,000 \$20,000
Tax (cost) or savings 1,200 (750) (3,000)
Net cash flow \$(6,800) \$4,250 \$17,000
Discount factor (12%) .893 .797
Present value \$(6,800) \$3,795 \$13,549
NPV \$10,544

Opportunity 2: Year 0 Year 1 Year 2
Taxable income \$5,000 \$5,000 \$5,000
Marginal tax rate .15 .15 .15
Tax \$750 \$750 \$750
Before-tax cash flow \$5,000 \$5,000 \$5,000
Tax (cost) or savings (750) (750) (750)
Net cash flow \$4,250 \$4,250 \$4,250
Discount factor (12%) .893 .797
Present value \$4,250 \$3,795 \$3,387
NPV \$11,432
Firm E should choose opportunity 2.

c. Opportunity 1: Year 0 Year 1 Year 2
Taxable income (loss) \$(8,000) \$5,000 \$20,000
Marginal tax rate .40 .15 .15
Tax \$(3,200) \$750 \$3,000
Before-tax cash flow \$(8,000) \$5,000 \$20,000
Tax (cost) or savings 3,200 (750) (3,000)
Net cash flow \$(4,800) \$4,250 \$17,000
Discount factor (12%) .893 .797
Present value \$(4,800) \$3,795 \$13,549
NPV \$12,544

Opportunity 2: Year 0 Year 1 Year 2
Taxable income \$5,000 \$5,000 \$5,000
Marginal tax rate .40 .15 .15
Tax \$2,000 \$750 \$750
Before-tax cash flow \$5,000 \$5,000 \$5,000
Tax (cost) or savings (2,000) (750) (750)
Net cash flow \$3,000 \$4,250 \$4,250
Discount factor (12%) .893 .797
Present value \$3,000 \$3,795 \$3,387
NPV \$10,182
Firm E should choose opportunity 1.

1. a. (1) Year 0 Year 1 Year 2
Before-tax salary/income \$80,000 \$80,000 \$80,000
Marginal tax rate .25 .40 .40
Tax on income \$20,000 \$32,000 \$32,000

After-tax cash flow \$60,000 \$48,000 \$48,000
Discount factor (8%) .926 .857
Present value \$60,000 \$44,448 \$41,136

NPV of salary received by Mrs. X \$145,584

(2) Before-tax payment /deduction \$80,000 \$80,000 \$80,000
Marginal tax rate .34 .34 .34
Tax savings from deduction \$27,200 \$27,200 \$27,200

After-tax cost \$(52,800) \$(52,800) \$(52,800)
Discount factor (8%) .926 .857
Present value \$(52,800) \$(48,893) \$(45,250)

NPV of salary cost to Firm B \$(146,943)

b. (1) Year 0 Year 1 Year 2
Before-tax salary/income \$140,000 \$50,000 \$50,000
Marginal tax rate .25 .40 .40
Tax on income \$35,000 \$20,000 \$20,000

After-tax cash flow \$105,000 \$30,000 \$30,000
Discount factor (8%) .926 .857
Present value \$105,000 \$27,780 \$25,710

NPV of salary received by Mrs. X \$158,490

(2) Before-tax payment /deduction \$140,000 \$50,000 \$50,000
Marginal tax rate .34 .34 .34
Tax savings from deduction \$47,600 \$17,000 \$17,000

After-tax cost \$(92,400) \$(33,000) \$(33,000)
Discount factor (8%) .926 .857
Present value \$(92,400) \$(30,558) \$(28,281)

NPV of salary cost to Firm B \$(151,239)

c. Year 0 Year 1 Year 2
Before-tax payment /deduction \$140,000 \$45,000 \$45,000
Marginal tax rate .34 .34 .34
Tax savings from deduction \$47,600 \$15,300 \$15,300

After-tax cost \$(92,400) \$(29,700) \$(29,700)
Discount factor (8%) .926 .857
Present value \$(92,400) \$(27,502) \$(25,423)

NPV of salary cost to Firm B \$(145,325)

This proposal is superior (has less cost) to Firm B than its original offer.

d. Year 0 Year 1 Year 2
Before-tax salary/income \$140,000 \$45,000 \$45,000
Marginal tax rate .25 .40 .40
Tax on income \$35,000 \$18,000 \$18,000

After-tax cash flow \$105,000 \$27,000 \$27,000
Discount factor (8%) .926 .857
Present value \$105,000 \$25,002 \$23,139

NPV of salary received by Mrs. X \$153,141

Mrs. X should accept this counterproposal because it has
a greater NPV than Firm B’s original offer.

A+

• Subject:

• University/College: University of California

• Type of paper: Thesis/Dissertation Chapter

• Date: 17 April 2016

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