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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