Ashley runs a small business, in Boulder Colorado. She expectsthe business to grow substantially over the next three years.Because she is concerned about product liability and is planning totake the company public in year 2 she is considering incorporatingthe business.The financial data is as follows: Year 1 – Salesrevenue = 150,000 tax-free interest= 5,000 deductible cashexpenses= 30,000 tax depreciation= 25,000 Year 2 sales revenue=320,000 tax-free interest= 8,000 deductible cash expenses= 58,000tax depreciation= 20,000 Year 3 sales revenue= 600,000 tax freeinterest= 15,000 deductible cash expenses= 95,000 tax depreciation=40,000. Ashley expects her combined Federal and state marginal incometax rate to be 35% over the three years before any profits from thebusiness are considered. Her after-tax cost of capital is 12%. a.) Considering only this data, compute the present value of thefuture cash flows for the three-year period, assuming Ashleyincorporates the business and pays all after-tax income asdividends (for Ashley’s dividends that qualify for the 15%rate). b.) Considering only this data, compute the present value of thefuture cash flows for the period, assuming Ashley continues tooperate the business as a sole proprietorship. c.) Should Ashley incorporate the business in year 1? Why or whynot? . . .

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