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Hi all,
Could anyone explain me why in the question solution in part b) the price in multiplied by 0.75? I know is a reduction of 25%, but why 25% if the probability to have in the first year a negative cash flow is 15%?
Many thanks in advance
Judit
It is because the tax rate is 25%.
For every $1 change in the sales revenue, the profit will change by $1 and therefore the tax will change by 0.25 x $1.
Therefore the change in the cash flow will be $1 x 0.75.
(You have asked in the Ask the Tutor Forum and so the person answering in this forum will always be me 🙂 )
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