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vyom
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| Posted: 26 Nov 2011 at 18:23 | IP Logged
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For the next 2 years, a lease is estimated to have an operating net cash inflow of $7500 per annum, before adjusting for $5000 per annum tax basis lease amortization, and a 40% tax rate. The present value of an ordinary annuity of $1 per year at 10% for 2 years is $1.74. What is the lease's after-tax present value using a 10% discount factor?
a. $2,610
b. $4,350
c. $9,570
d. $11,310
Could you please make me understand this question? how come the answer is option d.
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cpa_punk
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| Posted: 26 Nov 2011 at 20:31 | IP Logged
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7500 X 0.6 X 1.74 = 7830, 5000 X 0.4 X 1.74 = 3480, 7830+3480=11310. Isn't it? hope it helps..
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vyom
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| Posted: 27 Nov 2011 at 08:21 | IP Logged
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Solution given is:
Present Value of net cash inflow: 7500 X 1.74 = $ 13,050
PV of Outflow: (7500-5000) X 40% X 1.74 = (1740)
Lease's after-tax PV 11,310
- What I'm not able to understand is the computation of PV of Outflow: (7500-5000) X 40% X 1.74 = 1740
Can someone help?
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helencpa
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| Posted: 27 Nov 2011 at 10:11 | IP Logged
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ok, let me try it, it is a bit different and i got it from Wiley
7500-5000=2500(taxable income)*40%= 1000 which is the tax. Therefore, 7500-1000=6500 which is the net after tax cash flow multiplied by the PV factor of 1.74=11,310
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vyom
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| Posted: 27 Nov 2011 at 16:02 | IP Logged
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Thank You Helen!
Operating net cash inflow : $7,500
Less: Lease amortization (5000)
Taxable Income 2,500
Tax amount paid @ 40% rate 1,000
Cash inflow after-tax : $7,500-1000 = $6,500
After-tax Present Value: $6,500 X $1.74 = $11,310
Note: Amortization expense of $5,000 is a non-cash expense and is considered only for its tax shield; therefore, the only relevant amounts are the $7,500 operating net cash inflow and the tax paid.
__________________
Thank you,
Vyom :)
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Topic: Present Value Factor! Please help
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