Mrs Lester Has the Choice Between Two Transactions

question 53

Multiple Choice

Mrs. Lester has the choice between two transactions. Transaction A will generate $175,000 taxable cash flow in the current year (year 0) . Transaction B will generate $160,000 cash flow in the current year, but Mrs. Lester will not be required to report $160,000 income for two years (year 2) . Mrs. Lester has a 40% marginal tax rate and uses a 9% discount rate to compute NPV. Use Appendix A of your textbook provided to determine which of the following statements is true?

• A) Mrs. Lester should choose transaction A because it generates more before-tax cash flow than transaction B.
• B) Mrs. Lester should choose transaction A because its NPV exceeds transaction B's NPV.
• C) Mrs. Lester should choose transaction B because the tax cost is deferred one year.
• D) Mrs. Lester should choose transaction B because its NPV exceeds transaction A's NPV.

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Definitions:

Warm Current

A movement of ocean water that carries heat from the tropics toward the poles, influencing regional climates and marine life patterns.

North Equatorial Current

The North Equatorial Current is a significant westward-flowing ocean current found in the Atlantic, Indian, and Pacific Oceans, positioned approximately at the latitude of the northern equator.

Cold Currents

Ocean currents that originate in polar regions and move towards the equator, affecting the climate and marine life of the areas they flow through.

Warm Front

The sloping boundary between an advancing warm air mass and a cooler air mass.