Answer:
The NPV will increase by $5,187 following the restructure of the transaction.
Explanation:
We have the cash outflow due to tax payment as followed:
* Before transaction restructured:
Tax payment of 100,000 * ( 1 - 34%) = $66,000 at the end of Year 0;
=> Present value of this cash outflow is: (66,000) / 1.06 = $(62,264)
* After transaction restructured:
Tax payment at the end of year 1: 50,000 * ( 1 -34%) = $33,000;
Tax payment at the end of year 2: 50,000 * ( 1 -34%) = $33,000.
=> Present value of this cash outflows are: (33,000)/1.06^2 + (33,000)/1.06^3 = $(57,077).
=> Increase in NPV after transaction structured will be equal to the saving in present value of cash out flow = (57,077) - (62,264) = $5,187.
So, the answer is NPV will increase by $5,187.
