Mr Cox Has the Choice Between Two Transactions

question 45

Multiple Choice

Mr. Cox has the choice between two transactions. Transaction A will generate $500,000 taxable cash flow in the current year (year 0) . Transaction B will generate $460,000 cash flow in the current year, but Mr. Cox will not be required to report $460,000 income until next year (year 1) . Mr. Cox has a 40% marginal tax rate and uses a 10% discount rate to compute NPV. Use Appendix A of your textbook provided to determine which of the following statements is true?

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

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Definitions:

Diet Soda

is a low-calorie or zero-calorie carbonated beverage made with artificial sweeteners instead of sugar.

Substitution Effect

The change in consumption patterns due to a change in price, leading consumers to substitute one product for another.

Real Balance Effect

An economic theory suggesting that inflation or deflation changes individuals' purchasing power, affecting their real income and consumption patterns.

Marginal Utility

The additional satisfaction or utility gained by consuming one more unit of a good or service.