11. a. Year 0 Year 1 Year 2 Year 3 Year 4
Before-tax hard currency flow $ ( 500. 000 ) $ 52. 500 $ 47. 500 $ 35. 500 $ 530. 500
Tax cost ( 7. 875 ) ( 7. 125 ) ( 5. 325 ) ( 4. 575 )
After-tax hard currency 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 do the investing because NPV is positive.

B. Year 0 Year 1 Year 2 Year 3 Year 4
Before-tax hard currency flow $ ( 500. 000 ) $ 52. 500 $ 47. 500 $ 35. 500 $ 530. 500 Tax cost ( 10. 500 ) ( 9. 500 ) ( 7. 100 ) ( 6. 100 ) After-tax hard currency 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 non do the investing because NPV is negative.

c. Year 0 Year 1 Year 2 Year 3 Year 4
Before-tax hard currency flow $ ( 500. 000 ) $ 52. 500 $ 47. 500 $ 35. 500 $ 530. 500 Tax cost ( 5. 250 ) ( 4. 750 ) ( 8. 875 ) ( 7. 625 ) After-tax hard currency 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 do the investing because NPV is positive.

16. a. Opportunity 1: Year 0 Year 1 Year 2
Taxable income ( loss ) $ ( 8. 000 ) $ 5. 000 $ 20. 000
Fringy revenue enhancement rate. 40. 40. 40
Tax $ ( 3. 200 ) $ 2. 000 $ 8. 000
Before-tax hard currency flow $ ( 8. 000 ) $ 5. 000 $ 20. 000
Tax ( cost ) or savings 3. 200 ( 2. 000 ) ( 8. 000 )
Net hard currency 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
Fringy revenue enhancement rate. 40. 40. 40
Tax $ 2. 000 $ 2. 000 $ 2. 000
Before-tax hard currency flow $ 5. 000 $ 5. 000 $ 5. 000
Tax ( cost ) or nest eggs ( 2. 000 ) ( 2. 000 ) ( 2. 000 )
Net hard currency 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 take chance 2.

B. Opportunity 1: Year 0 Year 1 Year 2
Taxable income ( loss ) $ ( 8. 000 ) $ 5. 000 $ 20. 000
Fringy revenue enhancement rate. 15. 15. 15
Tax $ ( 1. 200 ) $ 750 $ 3. 000
Before-tax hard currency flow $ ( 8. 000 ) $ 5. 000 $ 20. 000
Tax ( cost ) or savings 1. 200 ( 750 ) ( 3. 000 )
Net hard currency 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
Fringy revenue enhancement rate. 15. 15. 15
Tax $ 750 $ 750 $ 750
Before-tax hard currency flow $ 5. 000 $ 5. 000 $ 5. 000
Tax ( cost ) or nest eggs ( 750 ) ( 750 ) ( 750 )
Net hard currency 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 take chance 2.

c. Opportunity 1: Year 0 Year 1 Year 2
Taxable income ( loss ) $ ( 8. 000 ) $ 5. 000 $ 20. 000
Fringy revenue enhancement rate. 40. 15. 15
Tax $ ( 3. 200 ) $ 750 $ 3. 000
Before-tax hard currency flow $ ( 8. 000 ) $ 5. 000 $ 20. 000
Tax ( cost ) or savings 3. 200 ( 750 ) ( 3. 000 )
Net hard currency 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
Fringy revenue enhancement rate. 40. 15. 15
Tax $ 2. 000 $ 750 $ 750
Before-tax hard currency flow $ 5. 000 $ 5. 000 $ 5. 000
Tax ( cost ) or nest eggs ( 2. 000 ) ( 750 ) ( 750 )
Net hard currency 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 take chance 1.

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

After-tax hard currency 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
Fringy revenue enhancement rate. 34. 34. 34
Tax nest eggs from tax write-off $ 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
Fringy revenue enhancement rate. 25. 40. 40
Tax on income $ 35. 000 $ 20. 000 $ 20. 000

After-tax hard currency 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
Fringy revenue enhancement rate. 34. 34. 34
Tax nest eggs from tax write-off $ 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
Fringy revenue enhancement rate. 34. 34. 34
Tax nest eggs from tax write-off $ 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
Fringy revenue enhancement rate. 25. 40. 40
Tax on income $ 35. 000 $ 18. 000 $ 18. 000

After-tax hard currency 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.