1. Calculate Present Value. Mary Martinez is ready to retire and has a choice of three pension plans. Plan A provides for an immediate cash payment of $350,000. Plan B pro- vides for the payment of $40,000 per year for 8 years and the payment of $200,000 at the end of year 8. Plan C will pay $35,000 per year for 8 years. Mary Martinez desires a return of 8 percent. Determine the present value of each plan and select the best one.
2. Cash Flow Implications of Tax Losses. WesternGear.com is expected to have operating losses of $350,000 in its first year of business and $270,000 in its second year. However, the company expects to have income before taxes of $400,000 in its third year and $650,000 in its fourth year. The company’s required rate of return is 14 percent.
Required
Assume a tax rate of 35 percent and that current losses can be used to offset taxable income in future years. What is the present value of tax savings related to the operating losses in years 1 and 2?