Acme Inc Is Planning a Transaction That Requires a $100,000 Deductible

question 48

Multiple Choice

Acme Inc. is planning a transaction that requires a $100,000 deductible cash expenditure. The transaction is structured so that Acme will pay the cash and report the deduction this year (year 0) . Compute the increase in the NPV of the transaction if it can be restructured so that Acme will report the deduction this year, but pay the cash three years later (year 3) . Acme's marginal tax rate is 35%, and it uses a 7% discount rate to compute NPV.

• A) $15,928
• B) $18,400
• C) $21,516
• D) None of the above

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Definitions:

Time Preference

An individual's predisposition to prioritize present benefits over future benefits.

Real Interest Rates

The interest rates adjusted for inflation, more accurately representing the cost of borrowing and the yield on savings than the nominal interest rate.

Productive Projects

Initiatives or activities undertaken by firms or individuals that result in increased outputs or efficiency.

Future Incomes

Refers to the earnings or revenue that an individual or entity expects to receive in a future period.