Mr Cox Has the Choice Between Two Transactions

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. 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.

Correct Answer:

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