Question

Firm H has the opportunity to engage in a transaction that will generate $100,000 cash flow (and taxable income) in year 0. The firm could restructure the transaction in a way that doesn't change before-tax cash flow but results in no taxable income in year 0, $50,000 taxable income in year 1, and the remaining $50,000 taxable income in year 2. Assume a 6 percent discount rate and a 34 percent marginal tax rate for the first year and in year 2 increases to 42 percent. Use Appendix A and Appendix B. Prepare a Restructured transaction. What is the effect on the NPV of the restructured transaction ?

Answer 1

Cash Flow
Year 0		100,000
Tax- Year 1	50000*34%	(17,000)
Tax- Year 2	50000*42%	(21,000)

NPV of Restructurred Transaction

65,272

Year	Cashflows	Tax	Cashflow after tax	PV Factor	Present values
0	100,000	-	100,000	1	100,000
1		17,000	(17,000)	0.9434	(16,038)
2		21,000	(21,000)	0.89	(18,690)
	Present value of Cashflows				65,272

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