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 Topic: Depreciation tax shield ( Topic Closed)
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jeanny
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Joined: 01 Apr 2009
Location: United States
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Posts: 21
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| Posted: 04 Jul 2009 at 14:20 | IP Logged
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I am confused with the following question. Can anybody help?
For the next 2 years, a lease is estimated to have an operating net cash inflow of $7,500 per annum, before
adjusting for $5,000 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?
Answer:
PV of cash inflow, $7,500 × 1.74 = $13,050
PV of cash outflow for tax ($7,500 − $5,000) × 40% × 1.74 = (1,740)
After-tax PV = $11,310
I would have added the 1,740? Why is the depreciation tax shield deducted? Thx in advance.
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NJD30
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| Posted: 04 Jul 2009 at 15:15 | IP Logged
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Here is my calculation...
After tax cash inflows: $4,500 (7,500*1-0.40)
ADD Lease amort. tax shield: $2,000 (5,000*0.40)
Total: $6,500*1.74 (present value factor)
After-tax PV = $11,310
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jeanny
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| Posted: 04 Jul 2009 at 15:37 | IP Logged
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Thx... so stupid.
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