# NWR has a choice between two strategies for reducing its taxes this year. Strategy 1 would reduce the annual tax bill by \$50,000 a

NWR has a choice between two strategies for reducing its taxes this year. Strategy 1 would reduce the annual tax bill by \$50,000 and would not cost anything to implement. Strategy 2 would cut the annual tax bill by \$65,000. However, this strategy will involve extra legal and accounting fees to make sure that it is structured properly. These extra fees will cost \$20,000 on an after-tax basis Which strategy should NWR proceed with? Both strategies are equally good at saving NWR money Strategy1 Strategy 2 QUESTION 12 Kantor Company is planning a transaction that will require a \$60,000 deductible cash expenditure. The transaction is structured so that Kantor will pay the cash and report the deduction this year (year 0) Compute the increase in the Net Present Value (NPV) of the transaction if it can be restructured so that Kantor will report the deduction on this year’s tax return (year 0), but pay the cash two years later (year 2), Kantor’s marginal tax rate is 25% and it uses a 9% discount rate to compute NPV Use the present value tables from your book. \$8,677 O \$9,014 \$9,480 \$7,110

## Expert Answer

Case 1:

NWR is having 2 choices to reduce tax-

strategy 1:It will reduce tax by \$50000

As there are no extra cost involved this strategy will result in increasing our income by \$50000.

Strategy 2: it will increase our income by \$65000 but involves cost of \$20000.

As this strategy involves extra cost the net increase in our income will be \$45000(65000-20000).

Hence, its better to adopt strategy 1 instead of 2.

Ans: Strategy 1

Case :2

Amt paid for the transaction by Kantor =\$60000

Tax rate of Kantor =25%

Hence, tax savings =\$15000(60000*25%)

Net Value ( 0 year) =\$45000

If Kantor pays after 2 years but deducts tax this year, the net value after tax=

(60000*842)-15000=35520

Hence the reuired increase in NPV to pay the amount after 2 years= \$45000-35520=\$9480.

Case 3:

Tax avoidance is finding out legal ways to reduce your tax liability.

Tax evasion means illegally paying less tax or avoiding tax liability.

Here in this case,David has own money from gambling and ncome from gambling is a taxable income. Hence David is liable to pay tax on \$850.

As he is willingly and illegally not paying the tax, it can be termed as Tax evasion.

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