Mrs Lester Has the Choice Between Two Transactions

question 79

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. 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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